The far greater part of the members are poor and miserable
November 30, 2018

Blain's Morning Porridge – St Andrew's Day

"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.."

Today is St Andrew's Day, the feast day of Scotland's patron saint, so let me start with something different this morning. Who can identify the Scotsman in the above photo?

I'll give you some clues – he's a very famous Economist. The Edinburgh Business School at Heriot-Watt University (the place that once tried to educate me) has redeveloped Panmure House in Edinburgh, the former home of the founding father of our Dismal Science. The house was at the centre of the Edinburgh Enlightenment of the late 18th century where the groundworks of modern finance and markets were first set. There isn't a single reader of the Morning Porridge who doesn't owe to something to his thinking on markets, the division of labour, the invisible hand and the sources of the wealth of nations.

Heriot-Watt are asking the inheritors of his wisdom to contribute towards the cost of the centre – by which I mean all the hedge fund managers (Paul, Alan, et al), chief investment officers (Bill, Neil, etc), bankers (Iain; short arms and deep pockets is no excuse!), investment bankers (too many of you!), entrepreneurial financiers (Chris and Chris), M&A geniuses (yes, I mean you Simon!), and business owners (Skippy?) who read the Porridge!

Without him… where would we all be? Probably with real jobs, not worrying about Trump, Xi, Powell, May, Putin and everything else…) 

Meanwhile, back in the real world… Two very contrasting views in two papers I read diligently. Gillian Tett in the Financial Times compares Donald Trump's attacks on the US Federal Reserve as analogous to an Agatha Christie novel – distraction as a plot device. She is, of course, spot on – Trump will blame anyone else as the US (and therefore global) economy slows. Demonstrating why she's a must-read opinion former, Tett credits Trump with being the most effective user of weapons of mass distraction than any leader before him. While she says Poirot would not be fooled, the problem is that the American electorate is.

The Wall Street Journal carries an equally fascinating article on how the Fed is dealing with Trump. It suggests Powell and his chums have adopted a very simple playbook for dealing with Trump:

Rule 1 – Speak not of Trump.

Rule 2 – When provoked, don't engage.

Rule 3 – Make allies outside the Oval Office.

Rule 4 – Talk about the economy, not politics.

These are very good rules, even if they do lead to some awkward moments. It's patently clear the most powerful central bank on the planet isn't really talking to the man who acts likes he's the most powerful man on the planet. Moreover, Trump deserves to be blanked for spreading doubts about the Fed's independence. Nice quote from Janet Yellen: "it becomes very damaging to the institution to be perceived as not acting in the best interest of America."

However, sticking to the economy, jobs and inflation isn't all the Fed has to be aware of. Sentiment matters – which is why it's so important the Fed communicates clearly. And I shall resist the temptation to quote the famous "If I made myself clear, I've misspoken" Greenspan quote. (Actually, Alan Greenspan at his peak came out with some crackers, like the immortal: "I know you think you understand what you thought I said, but I'm not sure you realize that what you heard is not what I meant".)

Understanding the gist of Fed speak is critical – so when Powell says interest rates are just below where they should settle (neutral) does that mean 1 basis point or a percentage point. It's a matter of scale. Remember, he said something about being a "long way from neutral" just a month ago – again did that mean a couple of cents (0.01 percent) or dollars (1.00 percent)? The market read it as dollars!

Worth a quick reminder on Fed Funds rate: (And I can pretty much remember most of this…). The Average Fed Fund rates since the mid 1950s has been just shy of 5 percent, and that includes the massive inflation of the 1980s. So, let's assume the new-normal rate is 3-3.5 percent. So, it would be a good guess to say that still very strong employment and low inflation means the low end – so three more 25 basis point hikes?

But we've got oil prices right back down again, a sentiment thump from the stock market correction and Powell is very right to note the Fed's concerns on how vulnerable many over-leveraged zombie US corporates will be to rising rates..

Unfortunately, Chairman Powell can't afford to pander to Trump. He really can't stand up and say:

"Thanks to the policy mistakes of the last ten years, it would not be prudent to hike rates to the neutral level that would best support continued strong and stable growth, promote steady sustainable wage increases and increasing prosperity across the country, while keeping inflation checked as a positive force for growth.

"Instead, we are keeping interest rates low because corporates are addicted to the opium of zero-rates, equity markets need free money from bond markets to keep stock prices high through buybacks to give their executives bigger bonuses, while not building new factories to create better paid jobs. We will keep the dollar strong and oil prices low to avoid inflation, although these are severely damaging our overseas markets.

"While the economy remains vulnerable to credit card debt, student loans and housing personal bankruptcy, a generation of children doomed to eternal penury and debt, it remains critical to keep in place low interest rates, even if they have made the rich richer and the poor poorer. Our policy will be to support our populist president, who was elected to solve these problems by ensuring these problems continue so he will get re-elected to solve the problems he is now maintaining."

Greenspan could not have said it better…

Have a great weekend, and back on Monday with the latest inside gossip from G20. Who will throw the first punch?

Bill Blain

Strategist

Shard Capital





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Blain's Morning Porridge – St Andrew's Day

"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.."

Today is St Andrew's Day, the feast day of Scotland's patron saint, so let me start with something different this morning. Who can identify the Scotsman in the above photo?

I'll give you some clues – he's a very famous Economist. The Edinburgh Business School at Heriot-Watt University (the place that once tried to educate me) has redeveloped Panmure House in Edinburgh, the former home of the founding father of our Dismal Science. The house was at the centre of the Edinburgh Enlightenment of the late 18th century where the groundworks of modern finance and markets were first set. There isn't a single reader of the Morning Porridge who doesn't owe to something to his thinking on markets, the division of labour, the invisible hand and the sources of the wealth of nations.

Heriot-Watt are asking the inheritors of his wisdom to contribute towards the cost of the centre – by which I mean all the hedge fund managers (Paul, Alan, et al), chief investment officers (Bill, Neil, etc), bankers (Iain; short arms and deep pockets is no excuse!), investment bankers (too many of you!), entrepreneurial financiers (Chris and Chris), M&A geniuses (yes, I mean you Simon!), and business owners (Skippy?) who read the Porridge!

Without him… where would we all be? Probably with real jobs, not worrying about Trump, Xi, Powell, May, Putin and everything else…) 

Meanwhile, back in the real world… Two very contrasting views in two papers I read diligently. Gillian Tett in the Financial Times compares Donald Trump's attacks on the US Federal Reserve as analogous to an Agatha Christie novel – distraction as a plot device. She is, of course, spot on – Trump will blame anyone else as the US (and therefore global) economy slows. Demonstrating why she's a must-read opinion former, Tett credits Trump with being the most effective user of weapons of mass distraction than any leader before him. While she says Poirot would not be fooled, the problem is that the American electorate is.

The Wall Street Journal carries an equally fascinating article on how the Fed is dealing with Trump. It suggests Powell and his chums have adopted a very simple playbook for dealing with Trump:

Rule 1 – Speak not of Trump.

Rule 2 – When provoked, don't engage.

Rule 3 – Make allies outside the Oval Office.

Rule 4 – Talk about the economy, not politics.

These are very good rules, even if they do lead to some awkward moments. It's patently clear the most powerful central bank on the planet isn't really talking to the man who acts likes he's the most powerful man on the planet. Moreover, Trump deserves to be blanked for spreading doubts about the Fed's independence. Nice quote from Janet Yellen: "it becomes very damaging to the institution to be perceived as not acting in the best interest of America."

However, sticking to the economy, jobs and inflation isn't all the Fed has to be aware of. Sentiment matters – which is why it's so important the Fed communicates clearly. And I shall resist the temptation to quote the famous "If I made myself clear, I've misspoken" Greenspan quote. (Actually, Alan Greenspan at his peak came out with some crackers, like the immortal: "I know you think you understand what you thought I said, but I'm not sure you realize that what you heard is not what I meant".)

Understanding the gist of Fed speak is critical – so when Powell says interest rates are just below where they should settle (neutral) does that mean 1 basis point or a percentage point. It's a matter of scale. Remember, he said something about being a "long way from neutral" just a month ago – again did that mean a couple of cents (0.01 percent) or dollars (1.00 percent)? The market read it as dollars!

Worth a quick reminder on Fed Funds rate: (And I can pretty much remember most of this…). The Average Fed Fund rates since the mid 1950s has been just shy of 5 percent, and that includes the massive inflation of the 1980s. So, let's assume the new-normal rate is 3-3.5 percent. So, it would be a good guess to say that still very strong employment and low inflation means the low end – so three more 25 basis point hikes?

But we've got oil prices right back down again, a sentiment thump from the stock market correction and Powell is very right to note the Fed's concerns on how vulnerable many over-leveraged zombie US corporates will be to rising rates..

Unfortunately, Chairman Powell can't afford to pander to Trump. He really can't stand up and say:

"Thanks to the policy mistakes of the last ten years, it would not be prudent to hike rates to the neutral level that would best support continued strong and stable growth, promote steady sustainable wage increases and increasing prosperity across the country, while keeping inflation checked as a positive force for growth.

"Instead, we are keeping interest rates low because corporates are addicted to the opium of zero-rates, equity markets need free money from bond markets to keep stock prices high through buybacks to give their executives bigger bonuses, while not building new factories to create better paid jobs. We will keep the dollar strong and oil prices low to avoid inflation, although these are severely damaging our overseas markets.

"While the economy remains vulnerable to credit card debt, student loans and housing personal bankruptcy, a generation of children doomed to eternal penury and debt, it remains critical to keep in place low interest rates, even if they have made the rich richer and the poor poorer. Our policy will be to support our populist president, who was elected to solve these problems by ensuring these problems continue so he will get re-elected to solve the problems he is now maintaining."

Greenspan could not have said it better…

Have a great weekend, and back on Monday with the latest inside gossip from G20. Who will throw the first punch?

Bill Blain

Strategist

Shard Capital



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