All political lives end in failure. (Proving there is a God after all..)
Meanwhile.. back in the real world…
Last week the markets were steeling themselves for a monumental Central Banks vs Inflation battle. How high would interest rates have to rise to stem inflation? How much would rate hikes crush markets? If a week is a long-time in politics, then it’s a lifetime in markets.
The game has now switched – just how damaging will recession be to the global economy? And what are the implications?
And suddenly the thinking of the market’s groupthink hive mind is… Recession? … The pace of interest rate rises will slow. … Central banks will ease liquidity to address recessionary risks. … Liquidity means cheaper rates. … Cheaper rates mean stocks look relatively cheap…. (lightbulb moment) .. Buy stocks! Buy Tech Stocks!
Oh dear. The market is not a rational being. It is just a voting machine reflecting the views of participants – who are often wrong and tend to jump to all kinds of silly conclusions.
But it is clear a new market theme is developing – recession is visible from cheaper energy and cheaper oil. Meanwhile, the overly strong dollar is beginning to damage US firms, likely to trigger weaker corporate earnings, thus a further market slide in Q3 – again likely to make Central Banks act to address economic and market weakness, and to weaken the dollar by slowing the tightening. In short, markets are talking themselves into an expectation of further monetary distortion and Central Banks bailing them out.
I suspect that’s how this summer is going to play out – a series of up, down, market shifts, from inflation, growth, recession, each leading to the volatile up 8%, down 9% price ructions we’ve been seeing in prices over recent weeks. There isn’t a single dominant theme – although one will eventually emerge. Part of the problem is central banks and their credibility.
I no longer have a clue what central banks are really thinking – if at all.
I suspect they are desperately trying to learn how to juggle. The beauty of juggling is making something difficult look easy. Back in the glory days of Central Banks they communicated by not telling us anything – if you understood, then they’d misspoke! The best central bankers were consummate juggles, able to look tough on inflation and the consequences of recession without missing a catch.
Juggling is an instinctive skill. The trick is learning to actually throw the balls rather than try to pass them. It requires a certain suspension of the natural way to do things – and it’s a light bulb moment when you learn how. It’s not something central bankers are likely to successfully learn overnight. (I reckon I teach anyone to juggle over the course of 3 hours! Yet another useless Blain skill.)
The failure of central banks to juggle, and the market jumping between narratives on growth, inflation, recession, stagflation and recovery is why markets will remain unclear through the summer as Central Banks try to figure out what their message is supposed to be. And if Energy Prices are low today, they might be back up there tomorrow.
The big, big No-See-Um is European Energy.
German energy policy in particular is a potential unravel moment. Germany is struggling to adjust to its over reliance on Soviet Energy, and Green Politics which are proving unyielding to the crisis. Germany was importing 55% of its gas from Russia pre-war. That has fallen to 35%, but it will take a difficult 2 years (at least) to build the infrastructure to end Germany’s reliance on Russian gas:
- it if happens, the Russia is the ultimate loser, its hold over Europe diminished.
- If it doesn’t happen Russia wins, and the European economy will remain beholden to Moscow for power.
The pressures on German industry will become progressively apparent in coming months, putting more and more pressure for an accommodation with Russia, such as forcing Ukraine to accept a peace and state dismemberment – giving away conquered territories. The pressure will be ratcheted up with Russian Kompromat over European politicians. If Europe does cave to energy pressure, the consequences will be enormous, in terms of markets, geopolitics, and especially the future relationship between the US and Europe.
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