London was lively. Restaurants, bars, museums…everything was hopping. In Hyde Park, a pair of sweaty Frenchmen completed a game of tennis. A group of people drank tea at a café. Women dressed head-to-toe in black, sat on the grass, enjoying the sun. An extended family had put out a blanket and a hookah pipe; picnicking in the park. A pair of tall Russians walked by.
It is easy to get around in London. You just go to the street corner and raise your arm. Generally, a taxi will stop soon.
Paris is another matter. If you want a cab, you have to find a taxi stand. Then, likely as not, there won’t be any taxis available.
And today, the taxis have gone on strike. Which is a nuisance to anyone who is going to the airport! Oh, and the trains say they are going to stop too, in sympathy with the taxi drivers. And just for good measure, the taxistas have threatened to block major roadways…notably, the road to the airport.
This is not the way to make friends and boost business. All over the city, people are considering their options… Walk? Get a motorcycle? Carpool? Your editor’s resourceful wife decided to open an account with Uber, an alternative taxi system. If we like it, the regular taxi drivers will have lost a customer.
Meanwhile, you remember our prediction for the US economy? First Tokyo, then Buenos Aires. That was our guess when the crisis of 08—09 began.
The idea was simple: the crisis would lead to economic stagnation à la Japan… which would eventually be resolved by government money-printing and inflation.
Held up against the facts, that prediction is an obvious forgery. It is correct in the broad outlines of the last six years. But the details are missing…including some very important ones.
Unlike Japan, the US stock market rallied. The bounce that we thought would be temporary and small turned out to be huge…and continues until today. Investors who took our advice successfully avoided one of the great bull markets of history. Will it last? Is it real? Who will have the last laugh? We don’t know. But for the moment, you will hear no satisfied giggling from this side of the trade.
On the other hand, the economy did track Japan and continues to do so.
It is strange the way the two things diverged. There is the stock market — which seems to be telling us that we have an American-style revival going on. And there is the bond market — whose puny yields whisper to us in Japanese.
The stock market is supposed to look ahead. Investors are supposed to anticipate changes in corporate earnings…which tend to come with higher revenue. Stock prices — at or near all-time highs — should be signalling better times ahead.
A real recovery, though, would come to the stock market like an exterminating angel. It would mean higher interest rates and higher consumer prices — as more and more borrowers bid for limited resources. The stock market would soon retreat as fixed-rate investments gained in popularity.
The bond market, where yields are falling, not rising, tells us to beware. It suggests that the US economy really is not improving; demand for loans remains weak; inflation, too, will likely be subdued.
What to make of it?
Which market is telling the truth?
Our guess is that we are still in Tokyo…with slow growth, low rates, ageing population, increasing debt and low consumer price inflation. The equity market, on the other hand, is a fake-out…an artefact of the biggest stock manipulation of all time.
Since we are spending so much time there, dear readers may be interested in knowing more of what is going on in Japan. More tomorrow…
for The Markets and Money