The small one Goldilocks with Goldilocks wanders through the forest and finds the empty house of three bachelor bears. He sees three bowls of porridge on the table. One is too hot, one is too cold and the third is tepid and perfect. Then he tries one chair, but it's too hard, he tries another one that's too soft, and finally a third one that's okay. Then she gets sleepy and she looks for a bed. The first one is too hard, the second one is too soft but the third one is just fine and you fall asleep on it. While she sleeps, however, the bears arrive. She wakes up and runs out the window. She will never be seen again.
Goldilocks original 1837 tale is all here. It has infinite variations and infinite interpretations but continues to appeal to children and markets. Children enjoy the repetitive pattern and forbidden thrill of breaking into someone else's house as they please and being caught in a questionable situation and still getting away with it. Markets like the three bowl side and the lukewarm choice (moderate growth with moderate inflation). The markets know that one day the bears will come to end the game but, like Goldilocks, they don't care as they enjoy the porridge, the chair and the perfect bed to relax and unwind.
Trump the bear had seemed to spoil the pleasant adventure by bringing too much growth and too much inflation. Sure, the extra growth would have pleased the stock market, but it would have led to higher rates and sent bonds falling. The Fed would sooner or later tighten too much and excessively strong growth would turn into a recession. Now that Trump's fingernails have been cut, he can go back to sleep and have pleasant dreams, such as that of the tax cut, which perhaps will only come in a year and won't be a big deal, but will still be welcome.
Here then they go back up together, hand in hand, bags and bonds. Badgers are once again perceived as placid as far as the eye can see (the ECB forecasts low and stable inflation for at least three years) and this allows the stock exchanges to bring down the equity risk premium. Put it to me in writing that rates will remain low for 50 years, Buffett likes to repeat, and the Dow Jones becomes purchasable up to 100. As long as one remains in the Goldilocks paradigm, the markets can continue to digest even the stones. We have now learned to arrive calmly at deadlines such as the British elections or the possible start of Trump's impeachment.
Serene calm, therefore, before risky events and serene calm afterwards, even if the outcome, as in the English case, is by no means optimal. The UK will have an even more tiring and costly Brexit, but somehow it will go on, thanks to the flexibility of the change. May is a woman for all seasons (she was against Brexit before the referendum) and he has no strategy for his country, which will enter one of the gray and sad phases that it happens to go through two or three times a century. Sterling will sell off every time he gets his head back up, but the London Stock Exchange, unattractive as it is, won't go down and the economy will stay on its feet. China will make London the terminus of its great Silk Road and will invest in the kingdom even if it will soon be outside the European Union. China has a long view and knows that the British, as they always have, will sooner or later invent a way to get back on track.
As for Trump's impeachment, we advise everyone to watch Comey's three hours of testimony before the Senate Intelligence Committee. It is a magnificent courtroom drama in which a former attorney general, Comey, is interrogated by a dozen senators, all former district or general attorneys, with a profusion of hypocrisy, perfidy and legal subtlety that no legal thriller writer would be capable of. At the end of this pitched battle between the great accusers, however, whoever comes out battered is more Comey than Trump. Which Trump, a former Democrat from New York who grew up in the political culture of Tammany Hall (I leave you, I place you in an institutional position and you then do what you are ordered), has exerted some undue pressure on Comey, but less than what any normal Democrat would have done in his place.
And since nothing has been proven about Russia yet, aside la shocking news that Russia is trying to spy on America, launching an impeachment, moreover with the stock market at its highest, is politically impractical. If England and America have not managed to disturb the harmony of the markets, Draghi has cradled them in the celestial harmonies of a Supergoldilocks made up of even more growth accompanied by even less inflation. Supergoldilocks, in turn, make it possible to prolong the life of monetary expansion, which in turn prolongs the life of the low euro and slows down its inevitable rise. A magical combination.
The question mark on Europe remains Italy, with its chronic inability to reform. However, if in 2011 Italy's relevance was systemic, today it is only local. With a Europe that is once again strong, the Italian stomach ache is more likely to resolve itself in the medium term in a European commissioner than in a contagion of the other countries of the Union. Furthermore, in the short term, the distancing of the vote and the certainty of an autumn maneuver agreed with Brussels could be appreciated by the markets. Goldilocks doesn't make it mandatory to buy high stocks and long bonds that are strong again. Day after day, the cycle is getting older and monetary policy, as we will see with the Fed's hike next Wednesday, becomes less expansive and, here and there, more restrictive.
What Goldilocks however, it may continue to form solid support over the next few months, not much below current levels. It will therefore be difficult to make new highs, but in return the correction that sooner or later occurs at least once a year will probably be moderate and bearable.
