Benedetto Croce has long gone out of fashion (today Gentile is much more so) but his idea that history is always contemporary history is alive and fruitful. The iconoclastic passion with which the statues of Christopher Columbus are destroyed in America and smeared those of Jefferson and even of Washington (Jackson had already fallen into disgrace for half a century) is the umpteenth demonstration that the Hegelian tribunal of history always judges on the basis of present law and never on that of the law in force at the time which the events took place. And even the politically correct falls into this trap, born as a relativist and contextualizer and today ends up being the most zealous applier of the judgment of absolute value superimposed on a totally decontextualized past.
Croce's thesis is so penetrating that it applies not only to the history of the past, which is continually being rewritten, but also to the history of the future. Science fiction, even the one that tries to push itself into the deep future, is always, filigree, a narration of the dreams and nightmares of the present in which it is conceived. Fifties science fiction is dark and paranoid, but in the following decade the first series of Star Trek is libertarian and light-hearted and applies the spirit of the Summer of Love to aliens as well. The second and third series become more composed but retain the Reagan and Clintonian optimism of their years. The last, the most boring, finally becomes politically correct and very respectful of the diversity of all life forms in the galaxy, but due to too many sermons it collapses the audience and closes ingloriously.
The poor gentlemen of the FOMC inflict on themselves every three months the exercise of telling in detail the story of the future, even if the details are limited to the next three years. They are not satisfied, as all other central banks do, with forecasting inflation and growth, but they go so far as to imagine the punctual path of interest rates in the three-year period considered. That would already be a lot, but, daring the unthinkable, they go even further and indicate the terminal equilibrium rate, the rate that the end of time will bequeath to eternity. One would imagine this yew carved in stone and eternally equal to itself in books of wisdom since the dawn of time, but instead it changes every six months or so.
It was 4.25 in 2012, dropped to 4 in 2013, 3.75 in 2014 and then, ever faster, to 3.25 in March 2016, 3 in December and 2.75 today. The extrapolative and not truly forward-looking nature of these estimates is clear. If inflation and growth have been lower than expected over the past six months, then they will be lower forever and will require a lower final rate. For heaven's sake, God forbid, it's not that humanly we can do more. Popper already demonstrated that, since the development of science cannot be foreseen, neither can that of history, of which the history of science is a component, be predictable.
And let alone that of rates. The problem is not the fallibility of estimates (only those who don't do not make mistakes). The market, aware or unconscious, continuously makes estimates about the future and therefore continually makes mistakes and corrects itself. The problem is that the difference between extrapolation (estimating the future solely on the basis of what is known today) and forecasting (estimating the future based on what is known, but also on the known unknowns) is not always clear. and those still unknown). The discourse may seem abstract, but it has terribly concrete implications. Today the markets see a world in apparent equilibrium and practically perfect.
Inflation is low and stable (for the ECB in two years it will be exactly as it is today and for the Fed it will be only 0.4 points higher in three years), growth is regular and the unemployment rate, at least in America, has stopped get too close to the level that kick-starts wage inflation and has recently moved into a calm and harmless spot. In this context, the central banks, thinks the market, they will only have to make small adjustments upwards in rates from time to time, but not as large as the Fed keeps pointing to us. In a beautiful and stable world, momentum is enough to push stocks up through a swell of multiples.
And the inertia force, as long as it does not meet obstacles, never runs out. For this reason, many think, it makes no sense to sell now just because the prices are abstractly expensive. We'll reconsider if obstacles arise, but why give up months, quarters or years of further possible upside? The problem is that we already know that 2018 will bring an almost certain obstacle and two possible interferences, not necessarily negative but probably destabilizing. The first almost certain obstacle is that global liquidity will stop growing for the first time since 2009 and will prepare to drop starting in 2019.
As for the two interferences, let's talk about the American tax reform, which maybe there will be and maybe not, and the new Trumpian Fed, which maybe will be the same as today's and maybe it will instead have a completely different orientation. If there is reform but the new Fed will be similar to the one we know then the stock market will go up, but rates and the dollar will be higher than we think today. And sooner or later, rates and the dollar on one side and the stock market on the other will collide. If then there is the reform and the Fed changes tack and becomes (or becomes again) ultra-expansionary, then we will have initially strong stock markets but long bonds in serious trouble, because inflation expectations will start to move upwards again.
The Fed's for Trump it will be a difficult choice between establishment and electoral consensus. It will also be difficult to find, apart from Yellen, a Republican candidate who did not burn out during last year's election campaign by calling for a rapid normalization of monetary policy, ie much higher rates. Whatever happens, the Fed and reform therefore risk becoming destabilizing elements with respect to the current placid and structured framework. For this reason we think that the line of inertia, that of staying calmly long bonds and shares without posing problems, should in any case be subjected to a stress test. There's no particular rush and until the end of the year you can even go ahead on autopilot, but it's better to go ahead, at least with reflection.
