It seems out of place after yesterday’s price action – with the gold rout and the Boston bombing, gloom has set in, at least in the rhetoric – but amid all that, the IMF has come out with a reasonably upbeat set of forecasts.
It wasn’t so much in their point forecasts, which are actually little changed from October and at okay rates – global growth is expected at 3.3 per cent (3.5 per cent late last year) in 2013 and 4 per cent next year. Rather, it’s that some of the rhetoric associated with the forecasts is more upbeat.
The IMF notes that conditions have improved since late last year as policy makers “have defused two of the biggest short-term risks to global activity” – being the break-up of the Eurozone (which if you’ll remember some investment banks such as Citi famously said was a 90 per cent probability) and fiscal problems in the US.
Out of place perhaps – or maybe it was a timely reminder that all is not as bad as it seems. There is often a disconnect between economic reality and the way that reality is presented.
Take the analysis of Chinese economic data. Some economists have gone so far as to make up their own numbers. Nup, they say – GDP is weaker than that, because I say so. It’s the same with the US, and the Fed are the worst offenders here. People talk as if growth is disappointing, forgetting the fact no one thought we’d even be here.
Anyway, following talk of yet another Summer slowing, housing starts shot up 7 per cent in March after a 7.3 per cent gain the month prior. The market was looking for a 1 per cent or so gain. This helped I would think – a turn in the housing construction will do much to buttress growth.
And so US stocks managed to rebound last night, not quite offsetting the losses of the previous session, but it was a good effort nevertheless. The S&P500 was up 1.4 per cent (1574) on broad-based gains, the Dow rose 157 points (14,756) and the Nasdaq was 1.5 per cent higher (3264).
As for gold, it rebounded a whole $6.50 last night and sits at $1367. So it looks like those huge price falls might be here to stay – we’ll see.
Regardless, my view on gold generally hasn’t a changed. I don’t subscribe to the view that gold is necessarily a bubble. Why? Because gold has intrinsic value as a store of wealth. Humanity has and always will value gold.
Add to that the fact that we are witnessing widespread abuse of economic policy – monetary policy in particular. Uncertainty is high. Finding a reliable store of wealth is tough in that environment and financial assets aren’t reliable.
Think of it this way. When the bond bubble bursts – and it will unless central banks plan to print forever (which we can’t rule out ) – where will those responsible governments, and other savers, go to protect their wealth? The game more than ever is wealth protection, and gold is an essential part of that. That isn’t going to change.
Related to that is the ongoing threat of inflation. Now, there are those who run around and say "Where? Where is this inflation problem? Inflation hasn’t surged, so there is no threat of it." Paul Krugman, who is little more than a Democrat propagandist in my opinion, is one of these. He misrepresents the theory though.
Inflation is certainly a problem now, and deflation is a ridiculous proposition. Inflation is stuck above target in the UK as the latest figures show – 2.8 per cent with the retail price index stuck over 3 per cent. Figures out of Europe show inflation at 1.7 per cent – below target but only just. Both of those economies are pretty much in recession though and inflation isn’t coming down.
In the US, people like Krugman point to the core PCE deflator, which is from memory just below 1.5 per cent, as proof that inflation isn’t a problem. "Where is the inflation?" he says. It's true to say that it’s below the Fed’s new stated comfort target of 2.5 per cent. But previously that comfort target was from 1.7-2 per cent and we’re not much below that now. Last year it was up over 2 per cent and more to the point, this index only ever travels within a very tight range – 1.1 per cent-2.7 per cent over the last 13 years.
That’s the reason the Fed loves it so much and that isn’t a testament to their success as a central bank – their failure as a central bank is evident by the GFC. No, it’s more the construction of the index – it just doesn’t move much. Having said that, it doesn’t take much to move over 2 per cent, it can do this in less than a year.
So for people like Krugman to sit there and argue that modest US inflation now means modest US inflation every year is simply wrong. Central banks need to be forward-looking and look at underlying drivers. That’s the point of policy that people like Krugman don’t understand, and a key reason why we seem to continually have some crisis or other.
If the Fed hadn’t been so lax with policy through the early 2000s we wouldn’t have had the GFC. People like Krugman were running around then telling everyone that inflation was licked – and then what happened? Five, six, seven years later it spiked, catching these gooses off-guard. Don’t forget – the fact that we don’t have deflation and disinflation is a surprise to these people. Having called the economic recovery so poorly, I don’t think we can then rely on their view on inflation.
Anyway, back to the price action – crude moves were small at 0.2 per cent ($88.88), copper was up 1 per cent and in the currency space we didn’t see much apart from a big figure rise in the euro (1.3182).
The Australian dollar is up smalls at 1.0389, the British pound is 60 pips higher (1.5367) and the yen sits at 97.56.
As for US treasuriess, not a lot either – yields a few bps higher with the 10-year at 1.726 per cent, the 5-year at 0.7 per cent and the 2-year at 0.225 per cent.
Looking at the day ahead, the SPI suggests our market will be 0.7 per cent higher. As for the data, there isn’t much – tonight's UK employment figures, the Bank of England's minutes and the Fed’s Beige Book are about it.
Have a great day…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.