How do you experience Christmas in Sydney, Buenos Aires or Johannesburg? In Bethlehem on December nights it drops to zero degrees and it is for this reason that the Christians of Romanitas inserted Christmas naturally into the pagan tradition of Saturnalia, the feast of the unconquered sun which has been celebrated since the Neolithic in mid-winter. On the part of Christians, it was a perfect example of what anthropologists call inculturation, the non-traumatic transmission of a new content by exploiting the shape of a pre-existing container.
The English, the Dutch, the French, the Spanish and the Portuguese who began to colonize the southern hemisphere in the sixteenth century did not have, with the exception of the Jesuit fathers, the same anthropological sensibility. The frost of the stable in Bethlehem was thus transposed verbatim into what is the hottest period of the year below the equator. The strength of faith, the charm of the Christian narrative and the nostalgia for the distant motherland were such as to overcome any difficulty.
Even today, the countries of the southern hemisphere with a Christian tradition celebrate and experience Christmas in ways similar to ours. It may happen to decorate the fir tree with the air conditioner on, to go to a midnight mass outdoors, to organize a Christmas lunch in the form of a picnic by the ocean, but the rituals and customs do not change. We exchange gifts, eat second-hand sweets and stay home from work for a few days in a context that resembles our mid-August. It seems surreal to us, but it works anyway.
A few hours ago, the Fed also began the navigation that will lead it to cross the equator and change the hemisphere. From the warm seas of monetary expansion, in which we still continue to swim anyway, we will slowly drift towards temperate seas. One day far away we will reach the cold polar waters again. And if the Southern Christmas lives on faith and tradition, and not on ice and snow, the equity rally will continue to thrive on growth even if it will slowly lack the stimulus from the Fed's purchases of securities.
From today, therefore, the course changes, but the policy remains expansive. When a southbound supertanker sets a northward turn of 180 degrees, the motion is in a U, not a V. This means that in the 6 hours that the first half of the long U-turn is traversed, the vessel is increasingly south, not north.
The monetary base created by the Fed was $900 billion before the crisis. From 2009 to today it has quadrupled to 3.6 trillion. Assuming the most likely assumption, a $10 billion reduction every 45 days (the FOMC interval) in base money expansion, the Fed's balance sheet will eventually have grown by another half trillion since 2014 and will to 4.1 trillion dollars. This without wanting to count the 900 billion that will be created by the Bank of Japan, which has said it is ready, if necessary, to further increase the creation of money.
At the end of 2014, however, the world's monetary base will be one and a half trillion larger than it is today. It will be even more if the ECB launches a new Ltro operation. These are not numbers for which to mourn, especially if one considers the acceleration of growth in all developed countries, temporarily excluding Japan, which is looming on the horizon for the new year.
Yes, but who can assure us that this acceleration will really take place? What miracle should guarantee it when for all these years we have seen nothing but weak growth or, in half of Europe, rapid decline?
The miracle is called taxation. 2014 will be the first year since 2010 in which fiscal policy will be neutral rather than restrictive, with the exception of Japan. Accustomed to new taxes every year, consumers will celebrate the truce with more optimism (or less pessimism in Europe). The propensity to purchase will grow, there are already clear signs in America and Germany. More will be hired, and labor in the US will have greater bargaining power. Wages will rise and income inequality (not wealth inequality) will begin to narrow, as is typical of the mature stages of an expansionary business cycle.
Rising labor costs will sooner or later induce companies to invest in new equipment. Productive investments have been one of the biggest disappointments of the last two years, but here too we have probably hit rock bottom. The mining industry, which has traditionally been a major buyer of capital goods and services, is almost done shrinking and depressing the overall data in this way. Other industries are booming. Just think of the planes, at a time when all the companies are finally deciding to renew their fleet.
As always, even the most positive things have a negative side somewhere. In this case it is the profit margins. Paying more for labor and spending more on plant and inventory reduces the percentage of revenues that can be distributed to shareholders or set aside as cash. The realistic hope is that revenues will grow faster and that final profits, in absolute terms if not as a percentage, will still be higher.
In addition to margins, multiples will also need to be seriously monitored. Their expansion, which has lasted for four years, will tend to stop as monetary policy moves from expansionary to neutral, a process that will still take a long time. How much? One year considering flows (as the market does), two years considering the stock of base money, as central banks do.
In the short term, the positive reaction of the stock exchanges to the beginning of the tapering is very encouraging. There are two differences compared to May-June, when the mere announcement of a possible tapering caused disorganized reactions and the beginning of a crash in the emerging world. The first is that there is no longer the surprise effect and, on the contrary, there is a sort of relief at the end of the uncertainty. The Green Mile atmosphere that reigned in the markets in recent days has dissipated. The second difference is that the macro data, current and above all expected, are much better today than those of May-June.
The market therefore seems to have emerged once and for all from the toxic pall of dependence on the Fed. The narcotic torpor of Quantitative Easing is replaced by the awareness of being able to do it alone. The world out there is less scary. In Washington there is no more fighting. In Europe everyone obeys Germany. In China, the new management appears to be increasingly strong and oriented towards promoting growth and the market. Japan will have to pass the difficult test of the VAT increase, but Abe is solid in the saddle and taxes for Japanese companies will decrease, while the increasingly weak yen will help profits and competitiveness.
It's the end of the year, a traditionally favorable moment for stock exchanges. Soon it will be January, another historically positive month. In this atmosphere many will be induced to buy. Our advice, to those who are already adequately equipped with shares, is of the opposite sign. It's just tactics, mind you. 2014 has all it takes to close on the upside. However, as David Bianco of Deutsche Bank notes, from 1960 to today there have been only three years in which the market has not experienced a correction of between 5 and 10 percent.
In 2014, with tapering in full swing, any disappointments will have a double impact. Not to mention the exogenous shocks (such as Libya and Fukushima in 2011), which have no longer disturbed us for some time but cannot be excluded for this reason. Naturally hoping that nothing happens, we could dedicate the first half of January to accumulating 5-10 percent of liquidity to possibly spend later in the year.
The tapering will take some strength out of the euro and give it back to the dollar. It will be more of a psychological effect, because rates will remain at zero everywhere. As for the emerging countries, they will periodically be offered as a cheap stock market alternative to America. However, as Cornerstone's François Trahan rightly notes, relative performance is not driven by multiples, but by economic policies. Until these policies improve, stock exchanges don't move. For this reason, we add, it will be interesting to follow the Indian elections. A change in government could result in a strong equity rally.
It will be an interesting 2014. Best wishes to all and see you in the new year.
Attachments: Article taken from Kairos
