Let's face it, being a central banker was easier at other times. Pressing the accelerator as has been done in the last seven years has given popularity and allowed us to be seen as saviors of a world plunged into crisis. But even being a brakeman, as Volcker did when he raised rates to 1981 percent in June 20 to beat inflation that had reached 14.5 percent, earned him an enduring reputation as a fighter against the forces of chaos.
Today that the world is doing quite well (and the markets are even better) being a central banker is becoming a difficult job. There are many possibilities for taking a false step, while the right path is narrow, difficult and above all still unclear.
Continue to the bitter end with monetary policies ultra-expansive, justifying itself with the fact that inflation is still modest, it risks provoking a generalized bubble of financial assets and fueling a euphoria of which we are beginning to see some signs. Should inflation eventually come, as the Tartars expected throughout their lives in the novel's buzzati, the bursting of the bubble would make the effects of a delayed rate hike even more severe and could lead to a recession.
But a recession could also be reached by the opposite route, that is by raising rates and abandoning the Quantitative easing too quickly in homage, as he would have said Keynes, to doctrines of economists who died more than 40 years ago, such as the Phillips of the famous curve. In a world where debt continues to climb and has reached 327 percent of GDP, getting the calculations wrong and raising rates a millimeter too much would send the spacecraft of the global economy lost in deep space.
Okay, one might say, in the end it's better to do nothing and limit yourself to small adjustments in monetary policy spaced out over time, as has been done so far. By moving carefully, no one was hurt, neither the economies nor the markets. That's true, but the passage of time works against the line of near immobility. Firstly, as we have seen, because the markets see it as the green light for unlimited expansion of equity multiples and for the unrestrained purchase of 100-year bonds from even questionable issuers. Secondly, because the time is getting closer and closer when the econometric models will start flashing first and sounding their sirens a little later to signal the exhaustion of the output gap, ie the petrol that fuels growth without inflation.
It is the awareness of time working against it and of the fact that sooner or later something will have to be done (either curbing or throwing models down the chimney, declaring them inadequate for our new world) that makes central bankers so nervous and elusive.
Here then is Yellen declare that financial assets are starting to be expensive, only to then, a week later, launch a new upward leg on the stock markets and nip a retracement of bonds in the bud by adopting soft and reassuring tones on the future of interest rates in his testimony before to Congress.
And here Draghi in Sintra to declare the arduous mission of bringing the European economy afloat in all its sectors and in all its countries with success, only to then reinsert in the latest press release of the ECB the completely pleonastic concept of further energetic expansive maneuvers should the need arise. And assume vague, ostentatiously imprecise tones on the timing and methods of saying goodbye to Quantitative Easing.
In short, in recent weeks all the major central banks (with the exception of Japan's) have sent the message of an acceleration of the process of normalization of monetary policy and then they all seemed to take a step back. Was it a trial ballon? Was it an attempt to reintroduce some volatility into the markets and thereby reduce certain excess positioning?
The impression is that you are navigating visually along a route traced on an old faded map on which the Phillips curve is drawn. The course is the same as always, but the speed of approaching the goal is erratic. Every now and then the engines are started and we go for a while, giving monetary policy a little tightening, but then we stop suddenly and we drop anchor in the middle of the ocean, waiting to see if the wind picks up. inflation.
In the meantime we try to give greater stability to the ship by adjusting the internal weights. We are slowly starting (since September) to empty the American tank of liquidity and we are preparing to reduce the flow poured into the European one, but on the other hand the Japanese tank is preparing to be filled even more aggressively. The net effect is almost nil.
This great work of liquidity transfers is accompanied by an adjustment in exchange rates which correctly reflects the backsliding of America and Japan and the new strength of the European economy. Being an adjustment decided at the table, it is better to follow the trend (short dollar and yen, long euro, Canada, Australia and emerging markets). When the adjustment is finished, it will be possible to exit at leisure, because there will be no volatility.
The stock exchanges celebrate the prudence of the central banks and the good profits (perhaps the last so good) of the second quarter and participate in the redistribution of weights in the ship through the new exchange ratios. And so European exporters, especially German, are lagging behind, while American exporters are gaining strength. It is not a redistribution of market shares, but a redistribution of profits, more to America and less to Europe.
With the weakness of the dollar, the leading stock exchange, the American one, hopes to compensate for the possible modest rise in long-term rates that the Fed is preparing for the end of the year. As for 2018, all is not yet to be considered lost on the tax reform front.
Bags e bond they will therefore continue to have no serious problems until the day when inflation is seen to rise. Today nobody knows if that day will be in three months, in a year or never. The more the markets go up, the more that day, if it ever comes, will be unpleasant. For this reason, the suggestion remains that of continuing to enjoy the bull market while being invested, but in moderation.
