Risk sentiment was subdued Wednesday as investors pondered sundry “peak growth” narratives and a couple of downbeat calls on US equities.
Concerns about the capacity of the US consumer to keep consuming didn’t help and neither did ongoing worries about the Delta variant. An outbreak in New Taipei City made headlines, for example.
Other virus news was less ominous, but increasingly, health officials are conceding that COVID is here to stay. “The chief of the Korea Disease Control and Prevention Agency said the nation will be able to control the coronavirus enough to consider moving into a phase of ‘living with COVID-19’ as early as the end of next month,” Yonhap reported.
I suppose this is obvious, but it won’t be possible for countries like New Zealand and China to stick with some version of a “zero COVID” strategy while the rest of the world decides to “live with” the virus. Or at least not if trade and travel are supposed to return to any semblance of normal.
Jacinda Ardern lifted New Zealand’s lockdown outside Auckland earlier this week. “We’ve done so well to bringing this outbreak under control, level four restrictions are working but the job is not done,” she said. “We’re within sight of elimination but we can’t drop the ball.”
With apologies, there’s no hope of “elimination” at this juncture. New Zealand will almost surely have another flareup. In China, the idea that the Party can keep a country that large totally virus-free is so ridiculous as to be barely worth mentioning other than to gently suggest (as Western media outlets have), that if China refuses to abandon the “zero COVID” pipe dream, global trade and commerce will be affected. Beijing would probably note that August’s trade data was robust indeed despite the temporary shutdown of the world’s third-busiest container port (over one asymptomatic case), but I’d suggest that feat will prove difficult to replicate.
In any case, I should mention that progress towards ending New Zealand’s lockdown puts RBNZ back in play next month. The bank held off on a rate hike in August purely due to the communications challenge associated with hiking rates on the same day that a lockdown was instituted.
Speaking of central banks, Robert Holzmann was on the record with more hawkish comments Wednesday, following up on last week’s chatter which caused something of a stir. “There is the possibility that we may be able to normalize monetary policy sooner than most financial market experts expect,” Holzmann told Eurofi Magazine. He cited “potential upward price pressures” from supply chain disruptions, pent-up demand and a hodgepodge of other factors that could prompt a semi-permanent, upward shift in inflation expectations. “Our monetary policy measures will stay in place until the crisis is over and inflation is projected to reach our target,” he added, noting that “this may happen sooner [rather] than later if my view on inflation developments is correct.”
I’m not sure if this occurs to Holzmann (it does, I’m just being facetious), but the last thing you want to do as a major central bank is catch the market off guard while trying to normalize policy. You absolutely don’t want to tighten “sooner than most financial market experts expect,” or at least not if the views of those “experts” are reflected in market positioning. That would be a recipe for disaster in the pre-GFC world, to say nothing of the ultra-accommodative limbo we’ve been living in for the past dozen years.
And please, don’t be deluded by any silly “rip off the Band-Aid” banter. If you, as a policymaker, decide markets have it wrong, you have to guide traders back inline with the likely trajectory of policy. Otherwise, you risk a disruptive episode that tightens financial conditions, forcing you to walk back what you just did. Catching the market off guard is self-defeating.
Holzmann’s colleague Bostjan Vasle struck a more predictable tone. “Pandemic measures, temporary in their nature, will be phased out eventually, but the current situation still calls for monetary policy to remain highly accommodative,” Vasle said Wednesday.
Whatever happens with the ECB and the Fed, you can always count on the BoJ. The bank’s “persistent easing stance” will continue once the pandemic is over, Haruhiko Kuroda said, during an interview with Nikkei. Additional easing measures could be adopted if necessary. When it comes to the ETF-buying program, any decision on an exit strategy “should be decided… when the 2% inflation target approaches.” (So, never.)
Meanwhile, Jones Trading’s Mike O’Rourke noted that Apple, Microsoft, Amazon, Facebook, Google, Nvidia and Tesla now sport “a market cap weighted trailing P/E multiple of 65X.”
“The fear of missing out is far more powerful than the fear of the triple peaks,” O’Rourke said, referencing the macro theme du jour. “It’s remarkable to witness these types of multiples in the face of the strongest economic growth in a generation,” he added, noting that “investors are paying peak multiples for peak growth, all in the name of safety.”
Perhaps building upon Mr. O’Rourke’s observation, this quote is from this morning’s The Bloomberg Open commentary:
“U.S. lawmakers want to take a bite out of Apple. The tech giant faces a bipartisan bill that would force big changes to how consumers download and use apps on their iPhones and other Apple devices. Amy Klobuchar said Congress isn’t willing to trust tech firms to do the right thing anymore.”
“investors are paying peak multiples for peak growth, all in the name of safety.”
This summary quote really nails it in my opinion. Central banks are trying to stave off catastrophe and are being incredibly accommodative, instead of viewing this accommodation as a red flag, the results of the accommodation are the very reason investors are piling into markets that are artificially generating balance sheets from said accommodation. Either this is now the status quo and, analysis is dead, or this is a temporary movement that will die a very tragic death.
The Fed’s “dual mandate” of creating their witches brew of ambiguous misdirection, jawboning and market manipulation is a public relations process that buys time and kicks the cans into the future. That process is nothing different than spinning a roulette wheel and waiting for the ball to drop near a random number — then using that lucky spin to confirm a projected probability. That Fed game related to their “duel mandate” is basically a series of unenforceable objectives that relies on luck, floating goal posts and obfuscation — versus anchored and locked-in finality. Policy is simply the political game of rearranging deck chairs.
The only reason to state the obvious, is that the average working person, in pursuit of The American Dream is locked into the specific terms and conditions of contracts, like mortgages — which lack the illusive qualities of Fed illusions.
The structure of wages and savings accounts dictate behavior and long-term planning within our economy, but as that structure becomes more and more linked to fantasy policies, doesn’t that increased risk destabilize our economy and provide the groundwork for catastrophe?
The Covid bubble that the Fed has engineered was binary, in that the only two choices were between a great depression and the existing mess. As the Fed buys more time for everyone, it’s likely that the mess will evolve towards a hybrid equilibrium that provides stability. However, now that that the genie is out of the bottle, finding a balance between real wage value and excess speculation will eventually become highly problematic — and unfortunately, the Fed spinning a roulette wheel isn’t going to solve anything.
” ‘Pandemic measures, temporary in their nature, will be phased out eventually…’ ” Unless, of course, this time things really are different and this virus is better at evolution than we are (which seems fairly certain). We haven’t stopped the cold (I don’t know about anyone else, but my colds are totally different from the ones I had 50 years ago) or the flu, both viruses of the same general type as COVID 19. We may be done with normal, in which case we’re going to need a bigger (healthcare) boat.