View from London: Why Investing Is About Storytelling
10/23/2017 10:20 am EST
This week may be key for watching the euro/US dollar as the driver for Euribor, eurodollars and equities, writes Bob Savage, CEO of Track Research over the weekend from London.
Investing is about storytelling. We learn the key stories early in our childhood but it takes a lifetime of telling to understand their meaning.
One has to think about reinventing Goldilocks and the 3 bears particularly – with the threat of a correction hanging over a market content to eat just the right porridge. The present market condition of higher growth, moderate inflation, extraordinary low rates has lifted global equity prices to record highs in much of the world.
The rise of talk about global reflation has left many watching commodities with oil up sharply last week and with alternative money like bitcoin breaking higher as well – now up 5 fold on the year over $5000. This would suggest that some don’t believe in the low inflation story and that is the key conundrum for understanding the confusing macro signals for trading as the world prices risk at fairy tale stability – “not too hot, not too cold, but just right” as Goldilocks would say.
The problem with believing in reflation in a world recovering from the Great Recession of 2008-2009 is in the rise of debt. You can’t reflate with more debt, only with more savings. Leverage requires real collateral. The higher debt to GDP for many nations despite lower rates has pushed back on the logic of the Phillips Curve and wage pressures on one hand against the PQ=MV on the other – where money velocity remains lower as banks hoard reserves rather than put money to work in the real economy.
The key test for this will be the US GDP 3Q October 27 and the China M2 release over the weekend and the expectations for 6.9% 3Q GDP report later this week drive.
The ongoing 3Q earnings season may be a critical piece of the puzzle in driving up the reflation story – as company plans matter along with how much they complain about forex.
The two key players from Central Banks – FOMC Chair Yellen and ECB President Draghi pushed back on the doubters about reflation – Draghi argued against the idea that low rates are the reason for higher debt levels, while Yellen stuck to the Phillips Curve and guessed that low inflation “won’t persist.”
However, the ECB vice-president blamed forex volatility for clouding the reflation story – and from that the next week may be key for watching the euro/US dollar (EUR/USD) as the driver for Euribor, eurodollars and equities.