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G7 Meeting Accomplished Its Goal: It Did Nothing

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Monday, 23 May 2016 08:11 AM Current | Bio | Archive

The G7 weekend get-together in Japan achieved all that was expected of it, namely nothing at all.

There were some disagreements on currencies, a normal platitude, and that was it.

Long-term investors might do well taking notice of a couple of statements that, at least in my opinion, are in some way foretelling what could be on the cards in the not so far future:

  • U.S. Treasury Secretary Jack Lew didn’t mention Japan explicitly, but nevertheless warned: “It’s important that the G7 has an agreement not only to refrain from competitive devaluations, but to communicate so that we don't surprise each other and we have a clear understanding on what the potential consequences of actions might be…,” which in clear terms means a currency war can’t be ruled out by any means if some of the main players doesn’t play by the rules.
  • German Finance Minister Wolgang Schauble expressed his preoccupation about the sustainability of today’s market price levels that don’t reflect economic realities: “We must be careful, that the progress we have reached since the financial crisis of 2008 must not be wiped out because of ... too much liquidity in the markets followed by increasing risk-takings.”

Yes, we could ask ourselves why should anyone expect anything from these kind of meetings when in fact, nothing has been really accomplished since the February, 1987 so-called “Louvre accord” that at the time aimed stabilizing the international FX markets and halt the continued decline of the dollar that had been caused by the September, 1986 “Plaza Accord” that was an agreement among the main world economic blocs at that time to depreciate the dollar against mainly the Japanese yen and the German mark through intervention.

Perhaps the problem is that once these groups like today's G7 and so on are established, it becomes very difficult to kill them off.

Eventually we will end up with a situation where politicians wither around the world attending multi-national get-together after multi-national get-together like backpacking students on a gap-year.  

It could also be, and this is important for long-term investors, we have come to a dangerous point where monetary policies try to deactivate organic economic growth, with its ups and downs, as long as they can, knowing very well that can’t go on forever.

In Europe and on the subject of the Austrian Presidential election over the weekend, we have yet to have a result. The live ballot was so close that postal votes will decide the outcome.

For long-term investors who have euro-related investments this issue is of interest, not because the office is an important one politically as the Presidential role in Austria is largely ceremonial, but because the anti-establishment nature of the candidate’s and the anti-EU stance of the Freedom party’s candidate Mr. Norbert Hofer is ahead in the live ballots and that only 40 percent of the postal votes in his favor are sufficient to win the presidential election. The final result will be known later in the day.

Elsewhere, there was the Greek government that passed their package of indirect tax increases, which was expected, opening the way for negotiations on debt relief. How the ordinary Greek people will cope with that remains an open question...

Today, we got also a disappointing May flash Euro area PMI that adds further to the suggestion that the better pace of economic growth in the Euro area as seen in the first quarter will probably prove to be only temporary.

The May PMI coming in at a 16-month low is signaling lackluster GDP growth of only 0.3 percent in the second quarter.

In the U.S. it’s all about the Fed as it should be.

Boston Fed President Eric Rosengren and FOMC voting member has indicated he is ready to raise the Fed funds rate next month suggesting that the conditions set out in the minutes have broadly been met.

San Francisco Fed President John Williams said from his side that elections this year won’t stop the Fed from raising rates and underlined the Fed has done it before and will do it again.

Nevertheless, markets remain non-believers.

This peculiarity may have something to do with the fact that economic data have consistently been revised stronger in the United States and markets ignore the revisions and usually price-in the initial increasingly unreliable data which is in sharp contrast with economists that are obliged to use the best quality data available in their models.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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In the U.S. it’s all about the Fed as it should be.
g7, meeting, investors, fed
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2016-11-23
Monday, 23 May 2016 08:11 AM
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