Thursday, November 16, 2006
Magical Thinking Applied to Economics
EUR/USD 1.2801 Hi 1.2842 Low 1.2793
USD/JPY 118.04 Hi 118.32 Low 117.74
AUD/USD 0.7685 Hi 0.7699 Low 0.7642
EUR/JPY 151.13 Hi 151.48 Low 151.08
We live in a world where some people actually believe that if they rearrange the letters of their names the entire course of their lives will be changed. So it shouldn’t really surprise me that this magical thinking extends to the field of economics, which is after all mostly guff and spin. But still it does surprise me. Most economists I know wouldn’t be able to run a business if they tried very hard and they certainly don’t have what it takes to run an economy but these are the priests of the New Age and we go to them, and our Central Banker friends, and ask for tokens to keep the bad spirits away.
What exactly is the RIGHT official cash rate, we enquire? What is the correct exchange rate? What is the right ratio of Government Debt to GDP? And these numbers, once established to the satisfaction of the priesthood, we take away with us. We applaud when Central Bankers fight their way to achieving the right numbers. We applaud when the Government announces the right bottom line. And if, by some sad chance, the numbers are not as they should be then everything suddenly becomes very dark.
The central premise here is that if we can just get the numbers right, an inflation rate which is where it should be, exchange rates right on the button, official cash rates which are not too hot, not too cold, then we don’t really have to worry about anything else. Our job is done, the Gods of the economy have been sated. We no longer have to worry about infrastructure or education or crime or how we allocate resources, productive investment or indeed anything. We can in fact all go off to the beach safe in the knowledge that the dark forces of the world are being kept at bay because our friends at the Central Banks have found the right numbers. Dumb, crazy, intellectually lazy ideas are part of how we live now.
The idea that a healthy economy requires continual work to keep things ticking along, that we can not afford to neglect public infrastructure, or private investment, that we must maintain what has been created and look to improve our productive capacity over time with well thought out investments is simply too complex. Predicting the numbers and watching the numbers has become what the economy is really all about. And what are the numbers telling us right now?
Well the news is bad, which means it’s good. The U.S. Consumer seems to have fallen down a well. Retail Sales numbers released this week were considerably below expectations. What’s more previous results were revised DOWN, by a lot. Overall, even with the FED in PAUSE mode, there isn’t much sign that Mr. Joe Average is getting ready to whip out his credit card any time soon. This week’s PPI and CPI data told a similar story: there is not enough strength in domestic demand in the States to allow prices to rise. And they’re not. They are falling.
Some of this has to do with the correction in OIL and commodity prices which has been registered recently and a lot of this has to do with the inability of U.S. business to shift inventory without cutting prices. And this is not just impacting the Residential Real Estate Market.
So, the upshot? Well we have a FED in PAUSE mode with little likelihood of a RATE HIKE any time soon. And so, with no room for a HIKE, the market is waiting for a signal that RATES will fall. The idea that the PAUSE will continue indefinitely is not really on the agenda. This is not a USD bullish development. Indeed, the recent short term USD rally seems pretty close to being over and we can all put our SELL USD hats back on.
The state of the U.S. economy and the implications for the FED FUNDS rate has comforted the Stock Market bulls. The idea, of course, is that the only thing which counts is whether the FED is going to hike, pause or CUT. And cut is winning. The fact that U.S. companies may see their profit margins eroded by weak domestic demand is not a concern right now, though historically it is hard to make a case for rising Stocks at a time of economic retrenchment. For now the Stock Market bulls are going to see how far they can push this, secure in the knowledge that the high priests at the FED will do what they have to with interest rates and that will be sufficient to cure all the U.S.'s economic ills. Well it worked for Japan, no actually it didn't. Oh well never mind. If fiddling with Cash Rates doesn't work maybe we can rearrange the letters of "Federal Reserve" and that will make everything better.
OIL 59.21
GOLD 627.40
With the USD back under a cloud, the GOLD bulls are back. We still have a way to go before we test recent highs. We need to see significant USD weakness and ongoing and more aggressive DIVERSIFICATION out of USDs by Central Banks before this trend really takes off. Some suggest that both are simply a matter of time.
USD/JPY 118.04 Hi 118.32 Low 117.74
AUD/USD 0.7685 Hi 0.7699 Low 0.7642
EUR/JPY 151.13 Hi 151.48 Low 151.08
We live in a world where some people actually believe that if they rearrange the letters of their names the entire course of their lives will be changed. So it shouldn’t really surprise me that this magical thinking extends to the field of economics, which is after all mostly guff and spin. But still it does surprise me. Most economists I know wouldn’t be able to run a business if they tried very hard and they certainly don’t have what it takes to run an economy but these are the priests of the New Age and we go to them, and our Central Banker friends, and ask for tokens to keep the bad spirits away.
What exactly is the RIGHT official cash rate, we enquire? What is the correct exchange rate? What is the right ratio of Government Debt to GDP? And these numbers, once established to the satisfaction of the priesthood, we take away with us. We applaud when Central Bankers fight their way to achieving the right numbers. We applaud when the Government announces the right bottom line. And if, by some sad chance, the numbers are not as they should be then everything suddenly becomes very dark.
The central premise here is that if we can just get the numbers right, an inflation rate which is where it should be, exchange rates right on the button, official cash rates which are not too hot, not too cold, then we don’t really have to worry about anything else. Our job is done, the Gods of the economy have been sated. We no longer have to worry about infrastructure or education or crime or how we allocate resources, productive investment or indeed anything. We can in fact all go off to the beach safe in the knowledge that the dark forces of the world are being kept at bay because our friends at the Central Banks have found the right numbers. Dumb, crazy, intellectually lazy ideas are part of how we live now.
The idea that a healthy economy requires continual work to keep things ticking along, that we can not afford to neglect public infrastructure, or private investment, that we must maintain what has been created and look to improve our productive capacity over time with well thought out investments is simply too complex. Predicting the numbers and watching the numbers has become what the economy is really all about. And what are the numbers telling us right now?
Well the news is bad, which means it’s good. The U.S. Consumer seems to have fallen down a well. Retail Sales numbers released this week were considerably below expectations. What’s more previous results were revised DOWN, by a lot. Overall, even with the FED in PAUSE mode, there isn’t much sign that Mr. Joe Average is getting ready to whip out his credit card any time soon. This week’s PPI and CPI data told a similar story: there is not enough strength in domestic demand in the States to allow prices to rise. And they’re not. They are falling.
Some of this has to do with the correction in OIL and commodity prices which has been registered recently and a lot of this has to do with the inability of U.S. business to shift inventory without cutting prices. And this is not just impacting the Residential Real Estate Market.
So, the upshot? Well we have a FED in PAUSE mode with little likelihood of a RATE HIKE any time soon. And so, with no room for a HIKE, the market is waiting for a signal that RATES will fall. The idea that the PAUSE will continue indefinitely is not really on the agenda. This is not a USD bullish development. Indeed, the recent short term USD rally seems pretty close to being over and we can all put our SELL USD hats back on.
The state of the U.S. economy and the implications for the FED FUNDS rate has comforted the Stock Market bulls. The idea, of course, is that the only thing which counts is whether the FED is going to hike, pause or CUT. And cut is winning. The fact that U.S. companies may see their profit margins eroded by weak domestic demand is not a concern right now, though historically it is hard to make a case for rising Stocks at a time of economic retrenchment. For now the Stock Market bulls are going to see how far they can push this, secure in the knowledge that the high priests at the FED will do what they have to with interest rates and that will be sufficient to cure all the U.S.'s economic ills. Well it worked for Japan, no actually it didn't. Oh well never mind. If fiddling with Cash Rates doesn't work maybe we can rearrange the letters of "Federal Reserve" and that will make everything better.
OIL 59.21
GOLD 627.40
With the USD back under a cloud, the GOLD bulls are back. We still have a way to go before we test recent highs. We need to see significant USD weakness and ongoing and more aggressive DIVERSIFICATION out of USDs by Central Banks before this trend really takes off. Some suggest that both are simply a matter of time.
Labels: Central Banks, Economic Cycles, Monetary Policy
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Thanks Mr. Blogger. I certainly will. We are also setting up an e-mail newsletter so please register if you wish to receive updates by e-mail.
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