After several weeks of solid upward movement, industrial commodities are beginning to fade once more, switching from a dynamic which posed a threat to the upper bound of the last six months’ trading range to one which suggests a mean reversion is far more likely.
Amid all the debate about the US economy and the somewhat vague prospect of the Fed finally showing some cojones at some point in the future, the principle feature which allows the Doves to block any renormalization of the rate is the supposedly soft state of the labour market, particularly with reference to the sorry-looking participation rate.
Though the punditocracy has become much more aware of the sheer scale of China’s equity bubble in recent weeks, it is still arguably the case that reality is running ahead of reportage even as more and more evidence emerges of just how dire things are in the world beyond the brokerage screens.
As part of our analytical process, we frequently consult our proprietary estimate of global money supply, something we construct by combining the individual measures for 15 countries (strictly 33, since we include the euro as one of them) which together account for almost three-quarters of global output.
Between Li Keqiang, Mario Draghi, and the BLS, markets everywhere had a wild ride into the weekend.
Starting east and working west, the upshot of the Chinese ‘Twin Sessions’ was a perseverance with the so-called ‘New Normal’ theme – namely, with the idea that headline, GDP-style growth should be lower in future with the emphasis shifting from brute volume to the encouragement of a shift in the productive structure towards the provision of higher-value added, more technology-rich goods, towards service in place of smokestacks, aall the better to spread the benefits of industrialization to the domestic populace.
Taken over a forty year history, US gasoline is trading in its 3rd percentile – 1.8 sigmas from the mean – when expressed as a ratio of the price of heating oil. In seasonal terms, this makes sense as the winter draw for space heating coincides with the consumption lull in (discretionary) road transport and the anticipatory change of emphasis by the refiners. Given the severe weather being endured Stateside these past several weeks, it should surprise no-one to learn that stocks of heat are more than 8% below the mean for thetime of year, while those for mogas are 4.3% above that norm. Hence the wider price differential.
More than half a century ago, in his role as an advisor to the men responsible for trying to set Taiwan on the road to prosperity, a redoubtable economist called Sho-Chie Tsiang argued that the monetary authorities should stop suppressing interest rates and directly rationing credit and should move instead toward a more market-oriented system where real rates were sufficiently elevated to encourage productive saving.
His reasoning was that the existing combination of what we might call Z(Real)IRP with ‘macro-prudential’ control was plagued with several significant drawbacks.
While money can be made in markets on the minutest of scales, sometimes it helps to have a broader sense of perspective. After all, if you can’t locate yourself on a map – without the aid of GPS, children! – you don’t know where you are and if you have no grasp of history, you don’t really know who you are either.
Here’s a question for all the cheering QEuro fans out there. If you came across a country where both real and nominal money supply were growing at rates in the low teens – something its people had not experienced for almost a decade and close to the fastest seen in the last four – would you consider it to be a victim of ‘deflation’? If not, what help do you suppose an expansionary central bank would be to it?
Wracked by the actions of the various central banks – which gave us another key reminder that volatility does not equate to risk – yet not wishing to start rethinking their entire thesis, a characteristic loss confidence has started to set in among those who were telling themselves over the Christmas trukey just what geniuses they were. We could have an interesting couple of weeks in store – not helped by the fact that we are about to enter the great Chinese data avoid as the lunar new year approaches.