Blain’s Morning Porridge – June 20th 2019
“Trump and the Lump – it’s a new buddy-cop series we’d like funding for”
Check out the new Edition of Property Chronicle: https://vimeo.com/342064460
In the headlines this morning: https://morningporridge.com/stuff-im-watching
(As I gaze out the windows of Shard Mansions, I don’t have a clue what’s up with the weather. It’s not raining and it’s not freezing… I don’t know what it is, but the sky is bright and hurts my eyes… How bad is this latest phase of our scary summer going to get?)
The big question this morning: Is Jerome Powell going to be sacked, or did he surrender to Trump?
You can’t please everyone all of the time. Lots of commentary this morning suggesting all kinds of variations on yesterday’s Fed Comments – and frankly that’s a concern. It’s not the Fed’s job to please.
We’re all familiar with the “If I seem unduly clear to you, you must have misunderstood what I said” Greenspan school of FedSpeak, but at least we had confidence he was above the mere flitter of markets, and resolutely independent of political interference… (ahem… actually… but..) When the Fed dodges, tries to please everyone but pleases no-one, that’s a sign of weakness – a Central Bank orbiting the president, and greedy markets demanding a cheap fill-up.
The Fed shouldn’t need to pander… IT’S THE FED….
Sadly, it doesn’t feel Powell has much leeway. Upset markets and they’ll scweam and scweam and scweam the Fed has let them down, and crush sentiment across the economy. Upsetting Trump is a given; a man who has already asked his lawyers to examine how he can remove the Fed Head, and will blame the Fed for whatever financial disaster his policies hit the US with. And, what happens in America, hits here as well.
I was hoping for something a little more courageous than the mumble-swerve of “favourable baseline, uncertainties, weight the outlook and [prepared] to call for monetary accommodation”. Markets and economic growth are uncertain. The comments were pretty ambivalent stuff last night. Being prepared to pander to a President desperately seeking an electoral fill up and a market greedy for yet more cherries, would be a dereliction of duty.
The consensus is a cut is nailed-on in July: 10-year Treasuries crashed through 2% yields. But stocks rose a tad (less than a bit, but more than a smidge), a sure sign of petulance they didn’t get a bigger ice-cream/spoonful of Columbian marching powder.
The job of the Fed is not to placate the short-term greed of markets or ensure the incumbent’s electoral prospects. The Stock Market is just a market. It is not the economy and is not what the Fed should be watching. When the Fed sounds more concerned with delivering something a) the markets can relate to, b) plays to Trump, and c) only vaguely sounds like they might be doing their job… well, its simply not good enough! It was satisficing of the worst kind, and it won’t end well.
What’s far more important is clearly and decisively re-establishing the independence of the FED. Although testing its independence may be contentious and damaging to market mood in the short-term, long-term its critical and worth doing. The market now expects, nay, demands, he eases next month. Powell should keep his powder dry, be prepared to comment on market uncertainty if Trump uses G20 to inflame the trade war, and stand his ground if its not necessary.
Long term – the last thing the US really needs is lower rates. It needs normalisation and a functional financial market focused on the long-term rather than tomorrow. Low rates don’t create growth, and they won’t rebuilt the infrastructure of the economy – low rates have proved an illusory short-term hit of addictive stuff, driving financial behaviours that do nothing to improve productivity, build future wealth and have largely served to make the rich richer, and keep workers underpaid. Inflation is hidden in financial assets – making the rich even richer.
Of course, change isn’t going to happen in this febrile atmosphere. Powell might change tack, learn how to entertain Trump and kick the can down the road Draghi-style, while dodging the inevitable scream of criticism he gets from Washington… but I don’t see him enjoying the role of Trump’s court jester or much prospect of him really ignoring the Washington Roar.. And that’s as good a reason as any for my confidence in markets to slip a notch lower…
Lots of other stuff to think about, but it will have to wait for tomorrow…
Out of time and back to the day job.. these salt mines aren’t going to empty themselves…