Sunday, 23 March 2014

Janet's Jackhammer

It's Sunday in Abu Dhabi and there's lots of noise coming from the construction site outside my hotel window (as there was for much of the night). I'm inclined to blame this on the Federal Reserve. This may same harsh but the UAE has pegged its exchange rate to the dollar (hence my tall latte this morning cost a mere £2.32, a mere 3% more than I paid last week in London). The other side of the competitive exchange rate however, is that monetary policy is too easy, asset prices rising and the Middle Eastern property boom is back  - hence the over-enthusiastic workers outside. Still, there's more chance that the hotel will change my room for one the other side of the building, than there is of the Fed tightening policy this year.

This tendency to see everything as being a result of Fed policy does have a serious side. In a world where the world's biggest economy has set the cost of money at a level that is utterly inconsistent with her own growth rate, let alone anyone else's (except perhaps the Eurozone's), asset prices rise to daft levels, irrespective of the 'fundamentals' of individual companies, or countries. Market analysis (particularly sell-side investment bank research) is reduced to guessing whether a particular share price is a 'dangerous bubble' or a 'justifiable boom', over-intrepreting every single utterance we get from the FOMC, and watching for random market-affecting events anywhere else in the world. Of course the 'exogenous shocks' from global political events then require London or New-York based analysts to sound like 'experts' in everything from Russian regional politics to Chinese currency policy.

Anyway, what we learnt about the world last week:

1) The Fed is not discouraged by winter weather-distorted data and will continue to pump money into the bond market at a slower and slower rate. Then, something like six months after they have finished buying bonds (which is an illustrative, not a literal six months) the Fed will start to raise rates, and the best guess of the committee is that they could be at about 1% rates by the end of 2015, maybe up close to 2 1/2% by the end of 2016, and perhaps just a little under 4% at some point in the dim and distant future, subject as usual to their changing their minds between now and then.

I am SO glad that's cleared up any uncertainty.

2) The Crimea became part of Russia, a bunch of names were put on a list, some more sanctions may or may not be imposed and in a wider sense, financial markets have not reacted very much. Europe is hurrying to wean itself off Russian gas according to the press, the leaders of several countries that used to be part of the USSR are very worried about what Mr Putin might do next, and, well, that's about it.

3) The Chinese renminbi has continued to weaken at a snail's pace and the subject is gradually attracting fewer headlines, though the publication later today of the first of the Chinese 'flash' PMIs will doubtless bring the issue top again. A tall latte in Beijing, I remind you, costs £2.63 and yet the consensus view amongst eco-people is that the currency will continue to appreciate in nominal as well as real terms from here. hey ho.

4) The UK had a 'Budget' and having spent years removing tax incentives to save for a private pension, the government has decided that in the future, pensioners won't have to buy annuities whose prices have been as distorted by Bank of England and Fed policy as any other asset. This has helped narrow the gap between Conservative and Labour parties in the polls, though it hasn't stopped the gap between 'yes' and  'no' closing in Scotland too.

We can now all move to on to analyse expertly the French local elections, before we get into the monthly PMI-fest tomorrow. Along with any random events about which people will have to become immediate experts. For myself I am gong to go on relying on Twitter to seek out and find me experts to explain the (very long) list of subjects about which I know almost nothing, while I try and work out whether the Fed's painfully slow pace of policy normalisation will strike fear into the hearts of the world's investors (somehow, I doubt it, but we'll see….). In the mean-time, I just need to get away from the noise of this Yellen-propelled jackhammer….

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