A Tide in the Affairs of Men
by Sean Corrigan
by Sean Corrigan
As we write, here at the end of the first quarter, several markets are exhibiting tantalizing signs of a sea-change. For one, stock markets just about everywhere outside of the pre-EU Accession Eastern European countries (a mania — if an understandable one — all of its own) and the back-in-vogue Japan have lost significant ground from their highs.
Intriguingly, if we exclude the anomalous Tech Hardware component — which, in the US, has undergone perhaps its largest divergence from the Software index in at least the past four years (largely, it appears, as a result of PalmOne doubling during March) — we can see that, worldwide, the performance of the MSCI broad equity groups over the past year has been pretty much what an Austrian analysis would suggest in an inflationary environment: higher order goods producers are making little or no headway, while retail, consumer services, finance and real estate have surged ahead.
Indeed, taking the tenor of recent news articles as a register of the broader mass consciousness, awareness is clearly growing that an inflation which has translated into soaring prices for a whole range of raw materials is no longer an undeniable phenomenon, nor is it an unmitigated boon to business — largely because, as Hayek pointed out long ago, whereas labour and capital goods can be substituted for one another to some degree, material resources compete with both in the firm's budget.
In the bond markets, too, the final week of the month saw possible trend-reversal days mapped out in most deferred short-rate contracts and note futures, followed by sessions where value was built lower thereafter; a development which a tape-watcher might take as a confirmation that the rejection of the recent highs will be a durable one.
In part, this was due to nervousness that the days may be numbered for the Fed's ludicrously loose policy — a scenario based primarily on signs of discontent from some (though not ALL) of the regional Fed presidents, and also on a slightly embarrassing uptick in the heavily politicized ‘core' personal consumption deflators to which Guttenberg Bernanke et al. have attached so much importance.
Against this, though, we have a much more relaxed line being maintained at the Board level — in part due to the nature of Greenspan's self-styled ‘special case' which we have laid out in detail for our clients; namely, the elevated indebtedness and severe economic imbalances which currently prevail.
Also affecting asset prices markedly — if mainly in foreign exchange — the Europeans have been expressing much less confidence of late in their stance of a steadfast opposition to an ‘activist' monetary policy — giving rise to expectations that the ECB may soon be trimming its rates, after all
Notwithstanding this, long rates have ticked up and deferred interest rate futures have, as we noted, rebounded from local or contract highs in the process.
This would not be the first time that the bond market has reacted adversely to signs of further monetary accommodation ahead, though this is decidedly a much less frequent occurrence in modern times, now that the famous ‘Bond Market Vigilantes' of yore have retired from their attempts to clean up Dodge in favour of a prime seat at the moral hazard faro table in Big Al's Last Chance Saloon.
Adding to the pressures, whatever their protestations about an outright cessation of the practice, it seems clear the Japanese have grown uneasy about the implications of continued massive forex intervention — especially now there are signs that domestic consumption and prices are responding to the current business and asset revival.
This, too, has meant that, despite an Y11 trillion BOJ balance sheet expansion in just one short month, JGB yields may well have embarked upon the next phase of a major flag formation, which could see 10-years in the 2.25% region and superlongs well above 3%
Significantly, with lessened official support of foreign bond prices via FX, private institutional appetite may also have become impaired at levels where, for example, UST10 years' pick up over their Japanese equivalents is at the bottom of a decade-long range.
Next, it should be noted that Gold has broken out in terms of European currencies and that it has been firm in the face of both a stronger USD and negative European central bank noises about reserve sales — something, incidentally of which the loss-making Bundesbank's latest experience of holding dollar paper hardly argues in favour!
If we were to credit the market with more collective intelligence than it perhaps possesses, we might say that this was due to a realization that the ECB is NOT the bulwark against monetary inflation we had all hoped, implying, in turn, that all paper IS equally bad, after all.
We might also worry that not only has the party debate in the US and the UK come to centre around who spends least wastefully (if only in terms of political capital, rather than of the real kind), rather than focusing on who spends least, but that the French local and the Spanish national elections, coupled with Schroeder's botched reforms and his displays of economically-illiterate invective against outsourcing as ‘unpatriotic', have marked an ominous shift to the economic left in the EU, too.
Granted that, to some extent, the Gold-Euro move may also be a reflection of the further tilt towards Japan as the most favoured major market. Certainly we gaijin are adding ever more quickly to the $120 billion pile we have poured into the Nikkei in the past fiscal year.
This last may be sound enough when you compare the index to the S&P in common currency and may even be argued to have some underpinning, given the recent improvement in corporate performance, but this is still worryingly dependent on the China Boom, all the same.
Against that, we could also note that, the Latin Americans, meanwhile, have banded together to demand that the budgetary constraints imposed upon them by their World Government creditors be relaxed.
In this, they have taken their cue from no less than the British Chancellor — and, with exquisite irony, potential candidate for the top job at the IMF — the ineffable ‘Culpability' Brown.
The idea — as practised currently in the UK and promoted in the EU by Brown himself — is to exclude state-led ‘investment' outlays (which are to be wholly self-designated, of course) for the purpose of calculating the Latins' mandated primary surpluses (themselves already joke indicators which exclude the swingeing costs of financing their mountainous and crushingly expensive debts).
That way, whatever ill we think of the IMF and its Ecumenical Platonic Corporate Socialism, one more hindrance to big government, to new New Deals, and to further wealth ‘redistribution' can be removed under the disguise of ‘fine-tuning the accounting criteria.'
Thus, pretty much wherever we look — outside Asia, at least — only a further, not a lesser, recourse to expansionary fiscal policy, coupled with an extreme laxity of the monetary kind, seems to be the prospect in a world economy already showing severe signs of strain.
No wonder gold is enjoying a good spell.
As for commodities in general, the usual caveats apply — volatilities will remain high with so much hot money chasing willy-nilly in to them (headhunters are supposedly now scouring London for traders with the relevant experience to join the mushrooming ranks of hedge funds!), while the risk that China blunders into a hard landing must be reckoned with, too.
However, there is still nothing to suggest that a secular bull market is not in place.
Just consider that the OECD estimate of worldwide broad money supply has risen at nearly 11% annually compounded in the past three years and has doubled in just the last eight.
Do you suppose that we have doubled exploitable reserves of oil, or doubled the capacity of nickel smelters, or copper refiners in that time?
Do you suppose we grow twice as much wheat, or harvest twice as many soya beans, or extract twice as much palm oil as we did in 1996?
Have the planet's forestry plantations doubled in area, or are the trees crammed into half the space, or do they now grow twice as fast as before?
Barring this, have we doubled our technical ability to make the plethora of things we need in our everyday lives from these same resources?
Plainly, the answer to all these questions is, No, and this means that goods, hard goods — the things which comprise tangible wealth — are still shrinking in proportion to the unbacked, instantly-created, electronic credit money which can be used to buy them.
Sharp reversals and violent sell-offs there may well be as the hot money crowd chases in and out of the game and as government-spawned malinvestment booms and consumer-excesses run out of fuel and plunge back to earth, but, absent a near complete breakdown of the global trading system, outside of a second, state-enforced Great Depression and excluding the Utopia of a return to sound, 100% reserve, commodity standard money — Things will remain a great deal harder to come by than Paper for many years to come.
One last point to consider: absent the hard-to-envisage enactment of a significant Fed tightening — and by this we mean a limitation of growth in the volume of credit, not just a marginal uptick in the price of its most ephemeral provision — if bonds AND stocks do decline in tandem, this means either capital outflows are occurring (we should thus see a weaker USD and relatively, though not necessarily absolutely, better markets abroad) OR a more solidly-based and intensifying shift into tangibles is underway.
In either case, US goods and asset prices might diverge sharply until the system adapts.
One of the many profound consequences of that would be that income might once more become a primary concern in place of the dominant hunger for unrealized capital gains in non-remunerative assets which has again come to characterize this, only the latest of all too many State-endorsed, easy money Bubbles.
April 3, 2004
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