It is warm in Paris. But rainy and dark.
We have come into the Café Poussin for coffee…
And for a little morning cheer.
Inside Café Poussin…
We watch the people come and go…we listen to the friendly banter with the bartender…we read the news.
Yesterday, the US stock market wiped out Wednesday’s gains. The Dow dropped 253 points — or about 1.5%.
Thinking it over, investors must have decided that Janet Yellen’s rate hike was not such good news after all.
‘New era starts as reverse repurchase drains $105 billion from system,’ declares the Financial Times.
(In a reverse repurchase — or ‘reverse repo’ — agreement the Fed borrows reserve funds overnight from banks in exchange for Treasurys it holds on its balance sheet. The rate it pays for these loans helps set a ‘floor’ under short-term interest rates.)
Hmmm…let’s see if we can figure this out. Money comes into the system…prices rise. Money goes out of the system…prices…
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Our view is unchanged…
We believe the Fed is trapped. It wants to ‘normalise’ — and raise interest rates back to about 4%. It wants to be a responsible steward of the US economy by ending the distortions caused by its own cheap money policies.
But it knows it must proceed slowly. A quick move to ‘normal’ would be disastrous.
So, Janet watches the incoming data like Scarlett O’Hara in Atlanta watching the approach of Sherman’s army. Sooner or later, the bad data will start coming…there will be flashes of light and loud crashing noises…and it will be time to get out of there!
Our bold prediction: The Yellen Fed will never get to 4% interest. As we forecast months ago, it will never seriously tighten at all. At the first sign of trouble — it will turn tail and run.
That’s what happens when you are ‘data dependent’: There’s always some data you won’t like.
The data the stock market seemed to dislike yesterday concerned the weakening global economy. The price of oil dropped below $35. Some analysts say it is headed to $20. Iron ore and other commodities are following suit.
Food won’t be far behind either. Neither will the emerging markets, many of which are the main providers of these resources.
This means that the debt that these industries and countries incurred is going bad. Borrowers are having a hard time paying, as their collateralised assets fall in market price.
That is the natural and normal consequence of lending money too freely. You end up with too much supply and too much debt. Then, the whole shebang collapses into a mess of defaults and bankruptcies.
Yes, when the Fed set out to drive the price of credit down to near zero…and then left the key rate on the floor for seven years…it was asking for trouble.
We wait to find out. But we don’t think we will have to wait for long.
‘Who’s going to win the US presidential election?’ French friends asked last night.
‘One of the Cubans,’ was our guess.
That is a prediction we can stick with, at least until the primaries are over.
‘The US economy is in far worse shape than the elite realises,’ we went on, without being asked.
‘You have to leave LA and Manhattan to see it. But out in the suburbs and the heartland, where most people live, people have lost income…and they’re losing patience.
‘They know something is wrong…and they don’t see the establishment candidates doing anything about it. That’s why they like Sanders and Trump. But Cruz and Rubio are smart. They’re going to steal Trump’s message…and present it in a way that is more acceptable to the media and the elite.’
We might have added there are more Americans without jobs than ever before. Forget the unemployment rate. The rate that counts is the labour participation rate. It tells us how many people are either working or actively looking for work.
And for American men, the participation rate is the lowest it’s ever been.
But it’s Friday…
So we’ll take it easy on the current state of the US economy…and turn instead to the archives…and something we wrote back in 2002 about the state of our airport security system.
Unfortunately, it may be as relevant today as it was back then…
The Episcopalian’s guide to airport security
Early yesterday morning…after his flight was cancelled…your editor had the illusion that comes so readily to him — of profundity.
‘Coat…’ the security guard had said to him a few minutes earlier.
‘Take off your coat,’ came the explanation from the factotum.
‘What’s the magic word?’
Common civility has given way to security needs, it seems, along with common sense and common convenience.
It was 6am. For the second time in less than 12 hours, the passengers on Air France flight 028 had answered the same dopey questions:
‘What do you mean, has my bag been in my custody…it’s been in your custody…I didn’t even have a toothbrush…’ answered a grumpy passenger with bulging forearms, after a night in the airport.
Now, we were getting another round of unsolicited close inspections. Many travellers were not happy. But few complained. After all, at least they were still alive. Their flight, scheduled for the night before, had been cancelled after the pilot dropped dead of a heart attack.
‘Take your shoes off…’ the guard continued.
‘I guess you have a lot of trouble with people trying to hijack 747s with penny loafers,’ I commented.
But the guard was as insensitive to sarcasm as he was to courtesy.
A search of the computer databases at the NSA or CIA or FBI would turn up few middle-aged Episcopal businessmen on the lists of suspected terrorists.
Still, in the interests of security you can’t be too careful. And you never know who will get the itch to blow up a plane.
‘Smile,’ we tell our son Jules, ‘and the world smiles back at you. Common courtesy, like common law, common sense, common decency…and traditional architecture and value investments…have a kind of magic to them.
‘Pay attention to them and good things happen. Ignore them…and you end up with monstrosities.’
Fickle finger of fate
People gripe about what morons these security guards are. But at least they get paid for their part in the national charade.
The rest of us are the real idiots — unpaid extras, standing in line under the pretence that every Girl Scout who boards a plane menaces the Republic.
Your editor was witness to an amazing scene on a previous flight…
In addition to the scrutiny given to everyone, airport security now includes deeper checks — in which a few passengers are selected at random. If you are chosen, the guards put on rubber gloves and riffle through your underwear and papers.
In the St. Louis airport, the fickle finger of fate pointed at — you guessed it, a group of Girl Scouts.
The odds that the girls — on their way to a jamboree — would pull out plastic knives and force their way into the pilot’s cabin were, shall we say, remote. The plane would more likely be struck by a meteor!
Still, the security guards worked their way through the girls’ panties and mosquito repellent with the seriousness of an orangutan defusing a bomb.
Even more astounding — other passengers neither laughed nor scoffed.
Often, we noted later, in our reflective mood…common sense finds few buyers…while absurdity is oversubscribed.
For there on the table in front of me in the waiting lounge was a copy of Sunday’s Washington Post. A headline tells us that the Bush administration has just reversed more than 200 years of military policy…and thousands of years of accumulated experience.
‘US Will Strike First at Enemies,’ said the headline, describing the president’s new line.
‘…the US can no longer deter attacks from other nations by threatening massive retaliation, but instead must strike looming enemies first,’ the Post goes on to explain.
How will the US know who is an enemy and who is not?
That was not explained.
Generally, a man waits until he is attacked. Then he knows he has an enemy he has to defend himself against.
Striking first is considered bad manners. It also leads to bad karma. Plus, it seems to lead where good people would rather not go.
A man who throws the first punch — swinging at enemies real and imagined — is sure to get into trouble sooner or later.
A dangerous situation
‘It is a dangerous situation,’ commented a friend in Washington.
‘I mean, the US is the world’s only superpower. Not having any competition makes people arrogant and lazy…’
‘Success is self-correcting,’ we assured him. The greater the success…the bigger the failure that follows it.
Napoleon, you may recall, decided to attack Russia because it posed a security risk to his continental empire.
Along the Seine, the vapours of arrogance and complacency had gone to the little Corsican’s head. But his campaign against Russia slapped him in the face; it was a total disaster.
Later in the 19th century, Napoleon’s nephew, Napoleon III, declared war on Prussia for much the same reason: national security.
There was no time to wait, he argued: ‘We have to strike first.’
Napoleon III feared the growing power of Prussia and Chancellor Otto von Bismarck’s plans to unify Germany. So, he decided to make the first move, before the Germans could organize themselves and do real damage.
The French army was not exactly prepared for action…but even after Waterloo, the Seine still reeked with the lingering odours of a bull market in French power.
Like American investors today, the French believed ‘we will always manage somehow.’ A few months later, Parisians still managed…just barely: They were eating rats…as the city was besieged by von Moltke’s army.
‘With hindsight,’ writes Paul B. Hatley, ‘historians realise that Napoleon III’s decision to go to war with Prussia ranks among the great military blunders in history.’ The French learned from this experience; they’ve attacked nobody since. The god of war, they noticed, turns his back on those who strike first.
But after the German victory, the stench of mindless pride drifted across the Rhine like toxic gas, where it remained in hollows, valleys, and shallow graves for many years.
Kaiser Wilhelm II decided to take the initiative in 1914 — sending his armies into action against Belgium and France. By 1919, there no longer was a Kaiser.
Then, in the late 1930s Adolph Hitler went on the attack, his nostrils flared with maniacal self-assurance.
He struck first to the west…and then to the east. In both directions, he enjoyed great initial success — followed by terrible catastrophes. By 1945, Hitler was no more.
Of course, we do not presume to know whether the Bush administration’s attacks will be more successful. We suspect they are shameful. But there is so much we don’t know, we hesitate to say so.
We don’t know if the people we meet are good people or bad…so we smile and say please and thank you, anyway.
We don’t know if stocks are going up or down — so we buy only those that represent real value for our money.
We don’t know if striking at presumed enemies will make the world a better place or a worse one. But in Dulles Airport on Sunday morning…we thought we smelled a strange and unsettling aroma wafting in from the Potomac…
For Markets and Money, Australia