That’s not a misspelling in the headline. ‘Narre’ means fool in German. And today’s Markets and Money is all about the persistent economic narretives that are melting away. We’ll start with the global recovery.
But does anyone even want to hear about the manufacturing index data that came out across the US, China and Europe in the last 24 hours? The figures certainly move markets. The ASX reversed a 40 point rally in short order as the China PMI index disappointed.
In the US, the Markit preliminary PMI surged to a four year high while the regional Philadelphia Fed manufacturing index plunged. Economists reverted to blaming their favourite bogeyman of late – the weather – for the divergence. This doesn’t hold up too well because the parts of the US less affected by weather are struggling the most.
So why does the story persist? Consider this quote from fictional vineyard owner Henry Skinner in A Good Year: ‘The thing is, Max old boy, I’m dying. I know this because, Dr. Karr, my physician, has stopped talking about my health and begun discussing the weather.‘
Economics today has stopped trying to explain the miserable state of the economy. It’s trying to explain the failure of its policy prescriptions by blaming the weather. Meanwhile, the patient is dying. Even while the economy remains on life support, the best it can manage is an occasional good PMI in the US and UK.
And, as we alluded to above, the narrative of an imminent recovery being just around the corner is beginning to break down. While traders in pits in New York, Chicago, Frankfurt, Sydney and Hong Kong get their knickers in a twist over ‘surprises to the upside’ and ‘surprises to the downside’ on manufacturing PMIs, the stock market is increasingly devoid of meaning for you and me. It’s the only thing keeping its act together as far as the financial world is concerned.
Despite US stock prices surging, across the world PMIs, GDPs, employment rates and the rest of the admittedly dodgy data say things are not getting significantly better. And on the ground, it’s even worse. People have had enough and are blaming their governments.
People in Venezuela are without toilet paper – a valid reason to stage violent protests, in our opinion. In Thailand there are riots. In Kiev, they’re protesting about…nobody seems to be able to agree to be honest. But the EU has decided to make it worse by imposing sanctions. And President Obama imposed his ‘red line’ on the Ukrainian authorities while his diplomatic agencies meddle in the state’s affairs and his intelligence agencies allegedly incite more violence. Yes, this is the same ‘red line’ that got him into trouble in in Syria.
In Turkey, the economy is going haywire. In China the shadow banking system is wobbling. India and Indonesia have a trade balance crisis. Across Europe consumer confidence is plunging and in Spain and Greece unemployment is holding steady above the ‘really, really bad’ level.
Even the lucky country is struggling with economic turmoil these days. At least the south-eastern tip is, as car companies and their satellites up and leave.
It’s been about seven years since the financial crisis began. Since then we’ve had the European sovereign debt crisis and now an emerging markets crisis.
Seven years of government and central bank fixes and interventions have achieved what? A rising stock market in the US. While everything else around the world goes to pieces…piece by piece.
Not to worry though, Treasurer Joe Hockey reckons he knows how to get things back on track. And the IMF’s Lagarde is backing him up for the G20 summit. According to Hockey, forecasting a return to economic growth isn’t enough to bring back economic growth. Nor is printing billions of dollars, guaranteeing the banking sector or bailing out entire sovereign nations.
What the world needs to do to return to economic growth is to target it. If politicians could just agree on targeting that elusive rate of growth which would fix everything (around 4%), the world would fix itself.
Now, let’s ignore the fact that everyone has been targeting growth ever since governments and economies have existed. Ever heard a politician say ‘we’re going to manage the decline in the economy?’
What does Hockey think governments and central banks have been doing all this time? And more importantly, what does he think they are going to do to bring about this targeted economic growth? Haven’t they already tried just about everything to no avail?
Here’s economics blogger Mish Shedlock’s take on the Chinese coming up with the same delusion as Hockey in response to their disappointing PMI manufacturing result from yesterday:
‘Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co – Head of Asian Economic Research at HSBC said:
‘"February’s flash reading of the HSBC China Manufacturing PMI moderated further as new orders and production contracted, reflecting the renewed destocking activities. The building-up of disinflationary pressures implies that the underlying momentum for manufacturing growth could be weakening. We believe Beijing policy makers should and can fine-tune policy to keep growth at a steady pace in the coming year"
‘Commenting on the Comments
‘Mish says Hongbin Qu is off his rocker.
‘The idea than [sic] central planners can "fine-tune" anything is laughable. Indeed, one should seriously question if they can "gross-tune" anything at all.
‘Even if central planners can "gross-tune" it is at a huge cost of bubble-blowing economics.‘
Yes, Hockey is off his rocker too. In all honesty, it’s probably a good political move to say something that is utterly devoid of meaning but sounds good and lets everyone important nod in agreement. So maybe Hockey isn’t nuts; he’s just a politician.
Only the Germans have expressed scepticism about Hockey’s plan to target growth, noting the world couldn’t agree on a similar plan for debt levels a few years ago.
The danger to Hockey’s plan is when the government actually tries to implement it. As Shedlock said, that can lead to bubbles. Not to mention burning insulation in roofs. The old economic fine tuning is a favourite of economists. And it’s another economic narretive.
Our mechanic can’t fine tune our car. Our doctor can’t keep hay fever symptoms at bay. Our financial advisor, if we had one, wouldn’t be able to prevent stock market crashes from wiping out wealth.
It’s the same for the economy and economists. It doesn’t matter how much you plug into the economy, or which economist you believe. These guys can’t even help an African village escape poverty, let alone bring about an international economic recovery. Their latest attempt, led by the famous economist and anti-poverty campaigner Jeffrey Sachs and financed by the world’s most successful hedge fund manager George Soros, came to pretty much the same result as the governments’ efforts in Kiev, Venezuela and Thailand. The African farmers protested, rioted, smashed in a window and burned the aid agency’s car.
But the worst narretive that economists have come up with is combining debt with growth. Economic growth used to be about productive capacity. You grew by saving, investing, becoming more productive, producing more and then trading more. Today, it’s much simpler. You lower interest rates, borrow more, spend more.
You’ve got to love quick fixes. They’re so much easier.
We’d like to finish the week by posing an entirely unrelated question. And no, it’s not rhetorical.
Why do houses in the Netherlands have two vases in their front window? If you don’t believe us, try zooming in on Google Maps to street level and peer in some front windows. The overwhelming majority will feature two vases. Some bigger, some smaller, some empty, some with plants.
If anyone knows the answer, please send it to email@example.com
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