The Child-Like Wonder of Central Bank Action

Markets are presently a bloated, dysfunctional leviathan.  Stock market sentiment continues to be glum – with the fourth-quarter 2014 earnings peak behind us, traders have grown disheartened by the slew of multi-nationals who’ve nervously reported half-empty outlooks on their companies - given the most recent resetting of currency and oil prices.

Just last month, analysts were hotly debating over the S&P 500 2015 earnings per share estimate.  As forecasters grappled with a sturdy earnings figure of $126 - $128 per share, the market quickly decided both figures were naive – offering a new normal circa late 2013 of sub $120 per share.  Although resolute in my conviction of lower oil being a net economic virtue, that simply continues not to be so as energy earnings – in aggregate – have managed to trip over a fundamentally low bar.  Sifting through the earnings reports, it appears a large swath of capital goods and industrials have suffered far more than any resultant benefit seen or heard from the consumer-oriented sector.

Lately, snap and/or surprise currency movements have prompted alarm among policymakers about the dangers and inferences of financial fragility and its general influence on the global economy.  Central bankers – seated around long, oak tables like suited academics who speak calmly in dense polysyllabic terms, roll their eyes over the bourgeois impulse of classic currency intervention. They cleverly disguise the same through slashing interest rates (Canada, Turkey, and Denmark twice), possibly stalling a rate hike (England, U.S.), or extracting one peg to another (Switzerland).  Even late-arriving guests from diverse, faraway lands including Norway and Singapore have raised eyebrows - asking if it’s not too late to drink from the dovish punchbowl.  Or, the stalwart Royal Bank of Australia – long dissatisfied with the party and its partygoers – may in fact play host next week!

Despite a shrinking consensus (including me) calling for a symbolic Fed rate hike in June, the market (inferred by futures and options) is now calling for lift-off in the fall.  The Fed dilemma has turned fanatically ludicrous – the U.S. jobs market continues to show strength, economic data continues to thread the needle of recovery – all suggesting a Fed funds rate somewhere above zero.  All that surety and yet, the 30-year Treasury bond has the audacity to trade at all-time lows late Wednesday!

Since 2013, the chief driver of U.S. dollar strength was the subtle yet real heightening up of U.S. economic data and thus an appropriate anticipation of turning in our monetary policy.  It should be clear that higher growth begets higher rates which beget a higher U.S. dollar which in turn begets a lower gold price.  Ironic yet most recently, U.S. yields have fallen back (yield curve has flattened), gold has found a bid and yet the U.S. dollar remains firmly resolute – obtuse to what is supposed to be.  Perhaps economic theory needs to once again be re-written?  Perhaps the European Central Bank (ECB) is now in the driver’s seat?

Growing up, I was surrounded by a host of urban legends – enough to make a N.J. turnpike diner menu look sullenly costive.  Stories including cereal box super-star Mikey who allegedly died from a lethal combination of soda and pop rocks candy abounded as the sheer lack of information (i.e. internet) created a fertile environment where tales could linger and grow longer with each passing summer.

One such legend was New York’s Chinatown’s restaurants sharing one large central kitchen.  As a young boy, this made perfect sense to the how their overly-cramped restaurants could offer such a lengthy menu and to the why their restaurants looked fastened together on a few streets in lower Manhattan.  I was fascinated as I imagined wait staff descending steep, narrow staircases – navigating the subterranean tunnels - into the labyrinth of the gigantic central kitchen and forgetting daylight for hours on end.

This childhood wonderment draws creative parallels over today’s central banks and their cozy mandates.  Are they working together?  Should they be?  Can they jointly or independently keep currency skirmishes at bay while winning this war against deflation?  Some would argue that banding together makes us stronger – we can together create any rate of inflation simply by pulling a lever marked “money supply.”

Perhaps, but the Japan experiment – not to mention the Great Depression – would argue otherwise which, brings to mind, that every new dawn brings a new market as the forces of supply versus demand attempts to digest sentiment and momentum mixed by both monetary and fiscal policies.

Late winter is a unique period that draws a peculiar similarity to our current market environment. I look out my window and observe landscapes full of old, tired snow seemingly holding hostage any life that remains beneath it. I note the bare trees, their branches limping with exhaustion, or the bramble best fit for next year’s fire pit. Combine with that, the days are getting longer, the gauze color skies become brighter and this morning’s singing of a male red winged black bird.

The signs are apparent – yet, I simply can’t imagine this period of deadness can possibly give birth to a renewal of flowers and fauna.  And yet, like winter, the markets will reset and revive and are currently doing so as we wallow in the various and sundry risks revolving around us.