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Both stocks and bonds hit new highs yesterday. (When bonds hit new highs, yields hit fresh lows – it works like a seesaw.)
Why? Because markets are facing a contingent of mega-dovish central bankers.
It looks like the European Central Bank will get a Mario Draghi-style loose money candidate in the form of Christine Lagarde, rather than the feared German disciplinarian.
Over in the US, Donald Trump is calling ever more aggressively for Jerome Powell to destroy the dollar.
Meanwhile, not to be outdone, Mark Carney decided to talk down the pound again.
If you didn’t believe we were heading for a monetary debasement festival before, you have to be starting to believe it now…
Why Christine Lagarde doesn’t need to know about central banking
So, first things first, we heard that Christine Lagarde is highly likely to be the next head of the European Central Bank (ECB).
Technically, Lagarde has just been nominated for the role. It still has to be approved (along with various other top jobs) by the European Parliament. But this is usually a rubber stamping exercise, and I’m assuming the same will happen this time around.
Lagarde doesn’t have specific central banking experience. But that probably doesn’t matter. The core job of the head of the ECB is to find a single monetary policy that works across the different economies of the eurozone. This, of course, isn’t possible.
That’s why the core skill required by the head of the ECB is politicking and diplomacy. And I’m assuming that Lagarde’s experiences in French politics and at the International Monetary Fund have qualified her for that.
She’ll know who she can ignore, and who she has to keep happy. She’ll know how to keep the southern Mediterranean “soft euro” contingent happy, while nodding and frowning in all the right places when she talks to angry German central bankers. This is why markets liked the idea of having her at the helm.
One problem is that she would probably struggle to come up with the sort of clever wheezes that Mario Draghi managed to pull off – “TLTRO” (targeted longer-term refinancing operations) and the like. But he has now done all the technical legwork – he’s left her with a big enough toolbox to draw on in order to keep loosening monetary policy without having to invent new schemes, or have stand-up fights with the “hard money” advocates.
Certainly, she might still mess it up. But from a big-picture point of view, she clearly has a bias towards keeping interest rates low and markets are lapping that up.
The currency wars are back on the agenda
Next, we had Donald Trump, stirring the pot as usual. Here’s a tweet the president sent out yesterday afternoon (UK time).
“China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!”
What’s the upshot? Trump wants a weaker dollar. If he doesn’t get it via Jerome Powell, then I suspect he’ll find a way to get it in some other way.
Finally (and from a global stage point of view, not all that importantly), we also had Mark Carney (who might replace Lagarde at the IMF, unless George Osborne pips him to that particular post). Carney gave a talk warning of a global slowdown, and generally joining in with the dovish chorus. That sent the pound lower.
In short, we’re firmly back into a period of currency warfare. And it does rather look as though the conflict will be a lot less civil than it was the last time.
The next big flashpoint to watch for is at the end of the month. That’s when the Federal Reserve is expected to cut interest rates.
Yet the biggest data release before then – the one that has the potential to upset the apple cart – is the US non-farm payrolls figures for June, which are out tomorrow.
If the figures are a lot stronger than expected, then that might just rattle the levels of conviction in markets that a rate cut is a sure thing.
Don’t get me wrong – I suspect that even a strong showing won’t stop the cut from coming. The Fed will just have to find a way to talk around it. But it could lead to a jittery few weeks’ trading, particularly if the Fed doesn’t rush out with reassurances that the number doesn’t matter.
That’s all short term though. Calls for “QE for the people” and its variants are growing louder across the globe. Politicians are competing on making ever-bigger spending promises, or plans to write off debts. Not all of these policies are necessarily bad ideas, but the direction of travel is very clear.
Inflation is no longer deemed any sort of threat. I’ve heard more than one smart person in the investment sphere essentially write off inflation ever returning. If inflation is dead and gone forever, then why not print lots of money?
I’m sorry to be a broken record on this, but this is why we suggest having a portion of your portfolio allocated to gold.
We’ll be discussing both the political and economic ramifications of all this at the MoneyWeek Wealth Summit on 22 November. I’d like to see you there, so book your ticket now to secure your early bird discount.