Blondemoney enjoys how this blog collates threads because it shows how themes seep through markets (even if it does also show up where she was wrong as well as right). How investors start to come to a realisation of what the driver is. We have had “Hands up if you’re not easing“, “Inflation” and even the esoteric “How volatility eats itself” …. the point is that new drivers turn up which shape how assets are priced: What happens if interest rates are low forever? What happens if inflation is back? What happens when volatility spirals downwards as well as upwards?
But now the theme is an even bigger one.
It has been perplexing to see just how confident everyone became in the narrative that Trump was the new Reagan, but trying to fight it would have led to short-term losses. It has been perplexing to see how Brexit fell off the radar. It has been perplexing to see how Le Pen hasn’t really got onto that radar. What’s been going on?
The market has the wrong rule book.
It’s no longer about economics. It’s about politics. But the market hasn’t appreciated that yet. Trump fit into the steeper yield cure narrative because the Republican clean sweep was due to deliver a fiscal stimulus. Brexit didn’t matter so much because the UK had delivered better economic data. France similarly isn’t an issue as European PMI data was turning higher.
For each of these, the focus on the politics was purely on how it might affect our standard economic view. Which is shaped by the central bank. To be fair, central banks have been the main actors for 10 years, the only people with the immediate tools to pull us from the abyss. Their mandates determined market moves. The ECB had to do QE to fight its inability to reach its inflation target. The politicians were all sidelined anyway, hamstrung by the markets, who would apparently refuse to fund those countries without sensible fiscal plans. Even when politicians did flare up, such as Tsipras in Greece, it was so that they would play ball with plans to bailout their bond markets.
Markets, markets, markets. We were on top. Primus inter pares. We drove it all. We were the tool to boost animal spirits after Lehman fell. We were the heart of the problem and we were there to solve it. We were Master and Slave of all central bank and political action.
But Blondemoney has to break it to you. We’re not any more. We are no longer driving how economies change; we aren’t dictating how economies must be run; we aren’t being manipulated as the only tool left in a threadbare emergency box. We are not the central hub.
So, now, we have to get used to this.
We are going to be the effect, not the cause, of a whole bunch of policies that are coming down from our political leaders. Currencies to be smashed up in trade wars; interest rates to ebb and flow with a return to normal monetary conditions; stocks to shift depending on tax policies.
If anything, all that buy-the-dip, low-vol from the last few year has just emboldened politicians to forget us. Of course, one day it will come back to bite them, but at this point we have to adjust to the new world order first.
This means understanding that their actions are not rational. Not quantifiable. Not designed just to avoid market mayhem, nor to lever off market positivity. “But the UK can’t agree a trade deal with Trump, it’s not legal!”, “If they do, GBP will get smoked and they’ll have to raise interest rates!”, “the EU won’t let the UK go easily”, “Trump will cut taxes and repeal financial regulation as first priority”, “There won’t really be a trade war because no one wins”……………………….. all of these thoughts might seem terribly sensible. Particularly if you have spent 10 years dealing with the simple equation that “policy makers will always cut interest rates to make things better; they hate volatility”.
Today’s US dollar sell-off is just the start. Trump might want to manipulate the dollar but more likely he just likes to throw it in there as one of his many tools to pick a fight and win the deal. Note, however, that it is his Treasury department that is in charge of dollar policy. He could meddle in currency markets far more than just naming someone a currency manipulator. Who’s to say that one day he doesn’t create a Moscow-Shanghai Accord that sees Russia and China’s central banks uniting against the ECB and the BOE to trash the US Dollar? Who knows – but the point is that the dollar will not then be driven by a rational response to monetary policy. It’s just another policy lever for the ascendant politicians. And who are they beholden too? Well, it’s the people to whom they owe their power.
The voter stood up and told them they wanted change. A change is gonna come.