Why Central Bankers Should Take Heed of the Anti-Establishment Sentiment

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The Dow is up. Gold is down. The British pound has stabilised.

The weather in London is cool and wet.

I’m writing today’s Daily Reckoning at the Starbucks in Chelsea, London. The coffee is bad, but the Wi-Fi connection is good. As I look out the window, people appear to be going about their business as usual.

Life does go on, irrespective of what Downing Street, Brussels or Washington has to say.

I think they’ve made a terrible mistake… It’s a terrible outcome in all respects’ — Former Federal Reserve Chairman Alan Greenspan.

The UK is going to be in the back of the queue’ — US President Barack Obama.

I can only describe this [Brexit] as a reckless and irresponsible course’ — UK Prime Minister David Cameron.

It is very clear that the country is going to be poorer. We are absolutely going to have to provide fiscal security to people, in other words we are going to have to show the country and the world that the country can live within its means’ — UK Chancellor of the Exchequer, George Osborne.

The elites have all put their two pence worth in during the lead up to, and after, the vote on Britain leaving the EU.

As expected, they are none too happy with the vote to exit the Eurozone.

How dare those ill-informed, bigoted, economically illiterate outsiders upset the cosy world of their fellow insiders? Don’t these pig-ignorant lower class plebs know what’s good for them? Don’t they realise we are fashioning the world with our vision of what’s good for them?

True, we didn’t consult the plebs. Yes, we do (lucrative) favours for our privileged mates. OK, we are building bureaucracies to concentrate power in government hands. We know those guys and girls in Brussels are unelected and unaccountable. But give us some credit. Don’t you plebs, uneducated, idiots good people realise that, from our aloof perches, we can see what’s good for you?

Many a true word said in jest. And my guess is that this type of conversation is going on in the hallowed halls of power. This is what happens when those on the inside lose contact with what’s happening in the real world.

Immigration was a major motivator for the LEAVE camp. Why? Outsiders are the ones most impacted by immigration. Immigrants tend to settle in middle and lower class areas. The integration between established residents and the newly arrived ones does not always go smoothly. Different cultures…

The perception of ‘our’ jobs being taken by the ‘imports’. Rising property values and rents are blamed on the demand created by the influx of immigrants. Waiting times at the local doctor’s surgery have increased because these immigrants are accessing ‘our’ healthcare system.

Whether these views are accurate or not is immaterial. We believe what we want to believe.

The elites do not have to contend with these local dynamics. Newly arrived immigrants do not take their jobs. They do not settle in their upmarket neighbourhoods. They do not visit their GP in the local High Street. To insiders, the intake of more people adds to the nation’s GDP growth. What’s not to love?

When you are disconnected from what the man and woman in the street is experiencing, feeling and talking about, it’s little wonder insiders talk in terms of ‘terrible mistake’ and ‘recklessness and irresponsibility’.

Their comments reflect how out of touch the elites have become with the people they are supposed to represent.

When I read this comment from the Chancellor, ‘…we are going to have to show the country and the world that the country can live within its means,’ in today’s Evening Standard, my immediate thought was, ‘Shouldn’t you be trying to live within your means whether you are in or out of the EU?’

Why does leaving the EU suddenly alter how you manage the nation’s finances? Osborne’s comment made absolutely no sense to me…especially when it was predicated with: ‘The country is going to be poorer’ and ‘provide fiscal security to people.’ From my experience ‘fiscal security to people’ is political speak for more welfare. How can a poorer country live within its means AND provide more handouts?

Osborne is speaking out both sides of his mouth.

While the impact of Brexit on the global economy is far from a known quantity, the same cannot be said of financial markets.

The central banker Pavlovian response in times of uncertainty and volatility is well telegraphed…more QE and lower interest rates.

I’ll bet you ‘London to a brick’ the US Fed has closed the file marked ‘raising interest rates’. As stated in previous Daily Reckoning articles, my view is that the Fed will be seriously considering lowering rates later this year AND hitting the money printing button.

A sinking global economy will compel Janet Yellen to react in her programmed Keynesian mode.

Japan is already starting to panic over the stronger yen. This was not how Abenomics was supposed to go. Abe’s voodoo economic strategy was purposely designed to undermine confidence in Japan and its currency. A weaker yen would give Japan an export edge over China and Europe. It worked for a while. But recent events have shown that markets consider Europe to be an even bigger economic basket case than Japan…and that’s saying something.

The yen is back to around the same level as it was when Abe went off the economic reservation.

Clearly a stronger yen is unacceptable to Abe. According to Bloomberg on 28 June 2016:

Prime Minister Shinzo Abe said he wants his finance minister and the central bank governor to watch markets more closely — even after both in recent days had highlighted they were monitoring conditions.

How much more closely can Abe expect them to watch markets?

The Bank of Japan (BoJ) has over US$2.3 trillion invested in Japanese government bonds (JGBs).

And its substantial holding in the Nikkei 225 Index (share market) is evident in the following chart from Bloomberg.


Source: Bloomberg
[Click to enlarge]

With that level of capital committed to bonds and shares, you’d think their eyeballs would be glued 24/7 to the flickering screens.

But then again, it is only printed money — created out of the ether — so maybe their care factor is pretty low. After all, there’s plenty more where that came from.

And it’s that last point — plenty more where that came from — that guarantees we are going to see Abe & Co (despite warnings from the US not to) unleash the mother of all (to beat the previous mother of all ) stimulus programs. The masochist in me cannot wait to see what Abe & Kuroda (BoJ Governor) come up with next.

The elites — in politics, bureaucracies and central banks — seem compelled to persist with actions that ultimately result in an unexpected (or at least it is to them) backlash.

The next round of central banker stimulus — which logically has to be even greater than the previous one — could be the tipping point for markets. The market response may well be an unexpected one: ‘Enough is enough, time to purge’.

The elites will be horrified. After all, it was their single-handed efforts that inflated asset prices. They created an artificially priced financial world according to their vision. How could the markets be so ungrateful?

Easy.

Markets may be greedy but they can also be fearful. Too much of a strategy that has clearly failed to produce any permanent benefit is a flashing neon indicator the underlying economy is in poor shape.

Corporate earnings ultimately reflect these deteriorating trading conditions. Lower earnings multiplied by a lower P/E multiple means share markets are headed much lower. Pretty simple math.

Here’s a crazy suggestion. Perhaps if the central banking elites went out and spoke with real people living in the world their policies have created, they may realise the errors of their ways.

But we all know that’s not going to happen.

So expect to see more stimulus and short term market gains that eventually give way to the reality of what the person in the street already knows…making ends meet is getting tougher.

When markets ultimately collapse from the insiders’ manipulation, central bankers are going to go from being ‘deified’ to ‘vilified’. And rightly so.

Central bankers should take heed of the groundswell of anti-establishment sentiment towards the political class, because their turn is coming.

Cheers,

Vern Gowdie,
For The Daily Reckoning

Vern Gowdie

Vern Gowdie

Vern Gowdie has been involved in financial planning in Australia since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top 5 financial planning firms in Australia. He is a feature contributing editor to The Daily Reckoning and is Founder and Chairman of the Gowdie Family Wealth advisory service and editor of the Gowdie Letter To follow Vern's financial world view more closely you can you can subscribe to The Daily Reckoning for free here.
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