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Investors Shouldn't Be Fooled by 'Irrational' Optimism

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Tuesday, 20 Jun 2017 10:54 AM Current | Bio | Archive

Everywhere one turns today, there is a central banker trying to elbow his way to the microphone to make himself heard.

A veritable cacophony of noise is being issued by illustrious members of the Federal Reserve in the wake of New York Fed President Dudley sounding cautiously comfortable with the idea of an ongoing tightening of U.S. central bank policy when he stated yesterday: “We’re pretty close to what we think is full employment … Inflation is a little bit lower than what we would like, but we think if the labor market continues to tighten, wages will gradually pick up, and with that, we’ll see inflation get back to 2 percent,” adding “If we were not to withdraw accommodation, the risk would be that the economy would crash to a very, very low unemployment rate, and generate inflation. Then the risk would be that we would have to slam on the brakes and the next stop would be a recession.”

Chicago Fed President Charles Evans was predictably sounding less urgent in his remarks yesterday suggesting a further rate hike could wait until next year.

Though, Evans’ statement does leave open the question of quantitative policy tightening this year.

Today, Vice-Chair Stanley Fischer, Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan all will jostle for market attention.

Hopefully, this economic offensive will help remind markets as well as investors that it is the long-term trend and not short-term noise or technical quirks that will drive decisions of policy makers.

Never forget that in today’s economic environment, the Fed is looking out to the end on 2018 or indeed early 2019 when considering its policy setting.

Over in the UK, today, the Bank of England’s Governor Mark Carney added to the roster of the North American accented central bankers with his speech at the Mansion House in London, which is the official residence of the Lord Mayor of London.

At the June 15 Bank of England’s Monetary Policy Committee (MPC) meeting when the current Bank Rate was kept unchanged at 0.25 percent, the Governor of the Bank of England faced considerable descent when 3 committee members considered it more appropriate to increase the Bank Rate by 25 basis points.

Mark Carney remained committed to keeping the Bank of England’s policy unchanged stating: “Given the still subdued domestic inflationary pressures, in particular anemic wage growth, now is not yet the time to begin that adjustment (Bank Rate increase).”

Carney gave also interesting remarks that for investors could be helpful when trying to understand somewhat of what’s economically going on globally stating: “Monetary policy is still challenged by the lingering risks of a global liquidity trap, with a very low global equilibrium interest rate, r* – the interest rate central banks must deliver in order to balance demand with supply and so achieve stable inflation … secular forces – which include demographics, the lower relative price of capital, higher costs of financial intermediation, and inequality – have reduced global long-term interest rates by around 4 percentage points since the 1980s. In addition, cyclical forces since the crisis including high policy uncertainty and hedging of disaster risk are exerting further drags on private investment, not least through reinforcing the option value of waiting.”

Long-term investors aren't on safe ground yet when trying to make sound long-term investments, notwithstanding all the optimism (to some degree irrational, at least in my opinion) that is out there at present…

Besides that, geopolitically speaking, tensions between the United States and Russia in the Middle East are not yet something that has caused financial markets to be concerned.

The price of oil remains relatively calm and that is the transmission mechanism that is most vulnerable to an escalation of problems.

The personalities involved and the ongoing “Russian question” being investigated in the United States do perhaps complicate matters, but at this stage there seems to be little prospect of markets to become too concerned.

Finally, German producer price inflation (PPI) rose by 2.8 percent y/y in May compared with a rise of 3.4 percent in April. The overall index disregarding energy was 2.7% up on May 2016. The consensus forecast had pointed to a rise of 2.9 percent, showing somewhat less pricing pressures in the German economy that is operating at full employment.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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HansParisis
Long-term investors aren't on safe ground yet when trying to make sound long-term investments, notwithstanding all the optimism (to some degree irrational, at least in my opinion) that is out there.
investors, optimism, decisions, trump, russia
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2017-54-20
Tuesday, 20 Jun 2017 10:54 AM
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