Demons In The Hills

Investors or, perhaps more appropriately, “traders”, were so focused on figuring out how to interpret Yellen and Draghi’s silence on policy in their remarks delivered at Jackson Hole on Friday, that the things they actually did say were summarily ignored.

Or if they weren’t ignored, they were written off as generic, token nods to the theme of the symposium.

Obviously there’s something ironic about Janet Yellen pontificating on financial stability (it’s possible to point to the Fed as, if not the proximate cause, at least an unwitting accomplice to previous bubbles that eventually burst) and we can all write plenty of jokes about Mario Draghi discussing a global economic recovery that by a whole lot of measures, is a mirage.

That said, there’s something profoundly stupid about making fun of symposium speakers for speaking about the topic of the symposium. I mean, sure, circumstances probably warrant some serious discussion about all of the things Yellen and Draghi didn’t mention, but you could say that about any speech anyone ever gave on anything anywhere.

I’m not going to feed you the “central bankers are people too” line, but for fuck’s sake, you can’t really shout about how there’s too much forward guidance and about how they’re not paying attention to risks and then turn around and malign them for eschewing forward guidance in favor of a discussion about risk.

And as it turns out, the risks they discussed are actual, real risks that have manifested themselves in observable and often harrowing ways in the past, which brings us neatly to the following brief excerpts from a good note out today from SocGen’s affable Kit Juckes…

Via SocGen

Meanwhile, at the Jackson Hole symposium Fed Chair Janet Yellen focused on the dangers attached to rolling back post-crisis financial regulation and ECB President Mario Draghi chose to warn about the threat to growth from the trend towards protectionism and away from free trade and globalisation. There may be all sorts of dragons and monsters up in those hills. The market reaction was, it seemed, to focus on what they didn’t talk about – monetary policy – and concluded there will be no near-term policy adjustments. But the subtext might as well be seen as being the on-going fragility of the post-crisis economy and the message is ‘don’t mess with this recovery or we’ll be right back where we started in a heartbeat’.

Of course, part of the message is to President Trump – winding back financial sector regulation, killing NAFTA, generally leaning against the tide of free trade; all of these could undermined the delicate balance of a recovery which has delivered growth in employment and GDP but not, yet, a recovery in productivity or in incomes on a sufficient scale. But the message could just as well be to ECB hawks (don’t push for normalisation too quickly) or even the UK (of all the decades to chose to vote for Brexit, this is just about the worst imaginable for the economy).

Whatever else though, we’re left with central bankers at the head of the two most important central banks in the world who see a surfeit of demons stalking the global economy and whether the ECB votes for further tapering of bond purchases this autumn, or the Fed presses ahead with balance sheet reduction, the pace of policy tightening will be funereal. All the more so as signs of inflationary pressures are as elusive as ever.

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