As we watch Jay Powell’s case dissipate on NYMEX WTI right before our very eyes, we can count on his ideology to try to make it for him in the absence of actual data. Economists will not budge no matter how much stacks against them; nor how many times we have to repeat this very exercise. This will be the fourth, in all likelihood.
Powell is sticking with his views, as is Mario Draghi in Europe, and Economists are falling right in line. Oil may be below $55 today, but inflation is still just over the horizon they will keep assuring us all the way to the bitter end.
In one camp, you have the likes of Societe Generale SA. The bank sees price pressures building into 2019, fueling demand for inflation protection, in part as investors anticipate more U.S. tariffs on Chinese goods. Morgan Stanley agrees, saying the import levies and job-market strength should pressure consumer prices higher next year.
It’s not an unimportant qualification, yet it is never one given out by the mainstream media. Who do you think it is that is pressuring WTI futures, or buying up UST’s and German bunds like they are in short supply (they’re not)? I don’t know for sure what either Societe Generale or Morgan Stanley is actually doing, obviously, but it isn’t an unreasonable guess to think both banks’ wide-ranging trading operations are in sync with everyone else’s on the deflation side of things.
In other words, when Bloomberg writes “Morgan Stanley agrees” what they really mean is Morgan Stanley’s Economists do. What the bank itself is actually trading underneath in the dank recesses of Lombard Street is almost certainly the opposite of the Economists’ expressed views here. One need only look to markets, and data, to find this great disconnect.
Thinking each bank views its own Economists without suspicion is how you end up with so many “unexpected” downturns.
German bunds, for example, had been on a small losing street until around October 9. Now, as oil prices crash, bunds are bid again even though the inflation case remains the dominant view in the media. The longer we go without an inflationary breakout the more emphatic the calls for it.
In truth, it was always thin to begin with, as global banks never really committed to it. In Germany, as in UST’s, the bond market overall resists the recovery scenario.
And that was the best of times. The most you could say in 2017 was that the upside wasn’t totally absent any longer like it was in, say, the middle of 2016. There was a plausible pathway, a modest one, toward something slightly better than pure awful.
That’s not quite the way to sell central bank success so “globally synchronized growth” was invented and enthusiastically marketed in its place. Even this mostly leaves it up to your imagination to fill in what that actually might be; because it always was emotion not analysis. What does it really matter if everyone’s GDP is positive at the same time?
We now know for sure what the answer is in 2018 – nothing. It’s practically gone now, but Economists are the last ones to figure it out. There is something in their math that makes them so unscientific.
Thus, as the bond market goes nowhere globally and market inflation expectations fall further with oil (the topic of the article quoted above), what’s left? Not even sentiment rocks the right column any longer. In Germany, the ZEW survey, an important indicator for it, came in at -24.1 for November 2018, practically unchanged from October (-24.7) at a level suggesting German therefore European recession. The more the negative numbers pile up month after month, the smaller the chance it can be due to anything else.
Therefore, global downturn. While the banks trade on growing prospects for that, Economists get all the attention in their name.