“Human Nature: Paleolithic Emotions, Medieval Institutions, God-Like Technology”
Central Banks and Politics will be the dominant theme this week/month/year. Politicians are anxious to show inflation and recession are not their fault. Blame Central Banks! The Politics of Blame has profound consequences for markets.
An interesting week ahead as global stock markets wobble on the cusp of a bear capitulation, while bond markets appear to be setting a bull trap for those who think recent drops and higher yields are a buying opportunity.
But something much deeper is underway… the swirling tides and currents of the Political Narrative are creating a dramatic shift in the way we’ve come to think about Central Banks and their supportive relationship with markets.
I’ve noted many times that over 50% of today’s market participants; traders, analysts, fund managers and bankers were still in education during the last Global Financial Crisis. Don’t dismiss them: they have brought fantastic new ideas, fresh thinking and greater tech skills and knowledge to the table, but they’ve spent their entire careers working in a market ecosystem where Central Banks have been ultra-accommodative and supportive of markets, where governments have demonstrated a willingness to stretch borrowing, and the consensus has been of the “Fed-Put” bailout; that market stability lies at the core of everything Central Banks are trying to achieve.
I am often accused of over emphasising the importance of politics on markets. I sincerely believe the political dimension is among the single most important factors acting on markets – and it is undergoing a seismic shift.
Inflation and recession loose elections. “It’s all about the economy stupid,” as some American said… Rule 1 in politics is “its always someone else’s fault.”
For a long time it has suited the political narrative to praise the independence of Central banks… after all they’ve been delivering policy results that nurtured political success. That is no longer the case.
There was plenty in the weekend press, and on Sunday TV shows, to illustrate the new Conservative strategy and direction here in the UK; deflecting blame for rising UK inflation onto the Bank of England. “It wasn’t me..” say the politicians. The Bank is an easy target. Hence the range of articles now saying it’s not diverse enough in its thinking, it’s in thrall to the Treasury (because, apparently, the whole civil service is an agent of the left), and it needs more businessmen, entrepreneurs, and other Tory supporters in its ranks.
Last week the Torygraph carried an interview with former Bank economist Andy Haldane who said the Bank failed to act fast enough to keep the lid on inflation. He was among the first Central Bankers to reject the “transitory” narrative central banks around the globe were pushing last year. He was right about transitory being misleading. Now the Bank estimates 10% inflation by year end.
But, the reality is the exogenous shocks of Covid, Supply Chains, and now Energy, and soon food prices, have precipitated inflation in the real economy. Let’s not kid ourselves: two factors successfully hid inflation for the last 12 years:
Most of the market stabilisation liquidity injected by central banks flowed into financial assets, where price inflation was mistaken for investment genius.
The Covid Supply Chain Rout and the Geopolitical Tensions now apparent between the West and China, (the end of the globalisation ages), has removed the deflationary nudge (in goods and services prices) that kept inflation low during the Twenty-teens.
As a result.. the West is being hit by a meteor shower of exogenous inflationary spikes.
Don’t blame the Central Banks. They kept the rickety façade of the broken Western financial system intact, avoided a catastrophic global depression, (the ECB kept the Euro together) and kept prices stable for 12 years.
To do so they made an underlying reservoir of over-abundant liquidity available to markets, created by central bank QE and ultra-low interest rates since 2010, and that was welcomed by Governments. It enabled market stability – but very low growth – while the apparent prosperity from rising stocks appeased the middle classes after the banking bailouts.
In retrospect the whole Twenty-Teens decade looks increasingly false – a Potemkin village founded on overly cheap money, government borrowing and undelivered political promises. It’s no wonder it became the age of the fantastical – growth stocks worth trillions but profits measured in pennies, crypto-cons, SPACs and NFTs. Booming markets supported by accommodative central banks have spawned a host of consequences – few of which will prove ultimately positive.
Central Banks knew the risks from the get-go. Now, they are trying to play a delicate game of unravelling (or tapering) the consequences of monetary stimulus while maintaining the market stability critical for Western Economies.
But now politicians need someone to blame. Which means we’re going to see a massive sea-change in the way Central Banks act: “So the Government wants us to cut inflation – fair enough:”
As the tensions between Governments and Central Bank escalate, the probability of catastrophic policy errors increases quadratically.. Its already happening…