So we were all waiting for the inauguration. Now we’re all waiting for…. what, exactly? Some kind of confirmation that either a) we should add to the trend of the past few months; or b) get the hell out. And for this signal, we look to what we have always looked to: policymaker intentions or shifts in the data. The latter suggests that we are OK 10-4 good buddy to proceed with a general reflation theme. After all, the world’s central banks are now finally shifting out of “lower forever” while the data shows a genuine and persistent upturn in inflation. If policymakers were only central banks it would be easier.
Or would it? Remember our favourite unreliable boyfriend, one Mr. Mark Carney? Remember how he was keeping rates low until unemployment hit a certain level. Then when we got through that level, it was keeping rates low until a whole host of indicators hit certain levels. Then eventually he ditched all of those and tried to remove forward guidance altogether. He is, as we all know, a consummate politician. And it’s in this vein that we should now look at the actual politicians. At least Carney really only had to be beholden to where markets took interest rates. The actual politicians have to look to the electorate. And if we think markets are volatile bullies, let’s see what happens when their voters take to the streets. On both sides, as we have already seen in the US!
A loyal BM reader sensibly pointed out on the weekend that Trump would spend his first few days simply revelling in his power, kicking back and relaxing at the countless balls and cocktail parties. That’s true, but it didn’t stop him (or rather his people) taking down a number of White House web pages (e.g. climate change), nor making sure the first media conference called by his press secretary involved shouting about “lies” over the size of the inauguration crowd and telling the media what they should be reporting. This would be almost amusing if it were not about to clash hideously with how we started this blog post. We are looking for confirmation, for signals. We have just found out that the new administration’s plan is NOT to signal the truth. It’s to obfuscate, deliberately. It’s to create a climate whereby no-one really knows, thus turning the world into ‘believers’, ‘non-believers’, and ‘too-confused-to-care’. The first set will cement Trump’s power; the second will rail against it, entrenching further the first set. The final set could, if enough division were sown, fall into the first set just because it’s easier. So anyone expecting this to upset the balance of power should be careful.
More significantly for financial markets, it means, and this is a point you’ll keep hearing from BM, that we are not the focus nor object of any policy pronouncements. We will be left to our own devices. We are not going to get regular policy updates, like when you have central bank meetings. If we do, they may leak beforehand. Or when the market is closed. Or be altered afterwards. It’s like the Supreme Court ruling on Article 50 tomorrow morning. It doesn’t really matter, because no MP would really vote down the triggering, given the weight of public opinion. Plus the unfortunate state of our opposition. The House of Lords is a different matter but even then they should struggle to oppose it or add many conditions to its triggering. Theresa May’s speech last week was designed to make it a fait accompli. The debate has moved on. It’s not about triggering, it’s about what Brexit will look like.
This rolling non-linear evolution of political risk is what will cause the market a headache until it adjusts. Time for the developed market world to take a look at how emerging markets do it. (Turkish Lira to US Dollar, anyone?)