Reading the smoke and mirrors from Jackson Hole
I feel like a bit of a fraud. I am about to try to review the Jackson Hole central banking symposium before it has ended. I’m actually about to take one further step onto the thinnest of ice by trying to review the most hyped part of the conference, the keynote Friday morning speech by Jay Powell, chairman of the Federal Reserve System, many hours before he has stood up. He opens today’s proceedings at 08:10 MT, 10:10 EST and 15:10 BST. His will be the only speech of the otherwise closed door conference that will be transmitted, live of course, to a global audience. Not even Christine Lagarde, his opposite number at the ECB will have that privilege. Or should that read burden?
Powel has a large cross to bear. Central banks have had a torrid time of late. While politicians of all hues were revelling and rejoicing in all the filthy lucre that was, by way of banks tax payments, streaming into national treasuries during the pre-GFC credit boom, none of them meaningfully cared where it came from and how it was being earned. When the wheels came off, beginning with BNP’s public admission in late 2007 that it held a portfolio of assets, the value of which it did not know, could not realistically assess but feared to be only a fraction of what they had paid for them and for which there was no market in which a true value could be established, the political classes from all sides turned away, washed their hands of the manifest legislative failings and left the mess for the central banks to clean up.
There is no doubt that, led by the Fed Chairman Ben Bernanke, the global response of slashing rates and injecting epic quantities of liquidity into the financial system – that was QE – not only saved the banks but also prevented their following a “nuclear winter” in the wider economy. The central banks did something very clever and also very dumb – they fought excess credit with even more credit. So, while the politicians were hiding behind the sofa, it was the central bankers who were imagined in boots, briefs, and cape and who found themselves universally hailed as the superheroes. Not that many years later, Greece hit the buffers and the eurozone looked as though it were about to breathe its last. Up pops ECB president Mario Draghi with his now legendary “…whatever it takes…” speech. Once again, political incompetence was to be glossed over by the central bank. By then – we’re talking the early years of the last decade – central bankers had achieved near God-like status and the Jackson Hole symposium had morphed from being a quiet academic affair organised by the Kansas City Fed into a feature of the global economic calendar on a par with Davos. Except that Davos is all about glitz, glamour, and self-promotion while, other than the Fed chair’s speech, Jackson Hole remains fairly low key.
As noted, the central banks have not had the best of times and especially not since the end of the pandemic when they manifestly failed to recognise incipit inflation for what it was, when what they did see they misinterpreted as “transitory” and when much of the world was crying out for a robust response to rising prices they pussy-footed around while trying to justify their view long after it had become evident that it was wrong. Their prized credibility was crumbling so they rode in, cracking the monetary tightening whip as they galloped into town, and went on a rate raising spree of unprecedented proportions. They talked a good game although it became clear that they were floundering. Cost-push inflation was being met with significantly higher interest rates. Yes, they had finally and far too late brought out the big bazooka, but they were also pointing it in the wrong direction. Squeezing the consumer works for demand-side driven inflation – too much money chasing too few goods – but it does nothing positive to affect a geo-politically driven rise in global commodity prices.
Now that rates are at a lofty level, wages are beginning to catch up with inflation and demand-side driven price dynamics are beginning to set in. Note that headline inflation is falling faster than core inflation. In the words of the late George Formby “Oh, Mr Wu, what shall I do?”
So, now we come to the 2023 incarnation of Jackson Hole and to Mr Powell’s speech. This year’s conference’s theme “Structural Shifts in the Global Economy” is a manifest attempt to close the book on the post-pandemic monetary policy fiasco and to focus on catching up with the shifting sands of a changing world. But where does that leave Chairman Powell?
At the centre of his address, were I to have written it, would be the call for patience. Steady as she goes. It’s no secret that the ivory tower economists within the monetary authorities got it horribly wrong and it would come as no great surprise if they were to be found to have remained behind the curve. If those of us with our ear to the rails are struggling, what chance for those who have never been in direct touch, other than in a private capacity, with business and consumers at large? After a decade of having been asked to play God, the Fed finds itself accused of being nothing than a false idol. Powell will today have to try to position himself and his colleagues at the FOMC somewhere in between. And to do so, he will repeat everything he has already told us again and again. The Fed is comfortable with rates where they are but will retain the option to tighten one more time, should incoming data demand so. The 2% inflation rate remains in place. The economy has so far reacted positively to the much higher rates – it did not fall off a cliff as many had predicted – and the interest rate structure will be reviewed once the trajectory of price formation has become more predictable. He will not say but will most probably be thinking that the economy can take care of itself while the Fed’s credibility is being rebuilt. As long as the Fed’s credibility continues to resemble a Swiss cheese and with the distinct possibility of the Donald retaking the White House in 17 months’ time, a floundering Fed’s independence might also be at peril.
On his side he will have the persistently strong retail sales numbers. Against him he has the repeated observations that Joe SixPack’s pandemic savings are now all but gone. The Fed Chairman will have to disregard such trivialities and be out there to prove that there really is such a thing as a one-handed economist.
Powell must reassure a sceptical world and sceptical markets that he knows exactly what he is doing and why while at the same time leaving himself a few sneaky trapdoors just in case. By the time he steps down from the stage, he will have had to have delivered the most political of speeches which will, however, have had to have all the while looked and sounded entirely apolitical. He will have to have sold old wine in old bottles as new wine in new ones. If he gets the tone right, the Dow might well rally by 500 or more points. If he doesn’t, the index which already shed 1,600 pts since 1 August, could give away another 300 or so.
I’m afraid I shall once again have to harp back to that great Greenspan line which is that if you think you understood what I was telling you, then you weren’t listening. As opposed to Greenspan, however, Powell has a reputation for plain speaking and for clear communication. That slightly limits his options when it comes to blowing smoke and erecting mirrors.
Just to put the whole conference into context, there will have been a bunch of papers given and panes held such as Stanford University economist Darrell Duffie and former Fed Gov. Jeremy Stein discussing structural changes to financial markets or UC Berkeley economist Barry Eichengreen opining on global financial flows. Laura Alfaro, a Harvard professor, will discuss global protection networks. The conference closes on Saturday with a panel discussion on “globalization at an inflection point” with the BoJ governor Kazuo Ueda, BofE deputy governor Ben Broadbent, and Ngozi Okonjo-Iweala, director general of the WTO. For markets, however, Jackson Hold will have been “done” once Powell has spoken.
Moving on, the BRICS jamboree in South Africa rumbles on. At its peril, the West will dismiss the get-together as a waste of time and energy and rather silly as it sets out to square up to the G7. When Jim O’Neil of Goldman Sachs created the shorter BRIC acronym in 2001, he did so for no other reason than to point to four economies which were too big to disregard but all in essence too underdeveloped to be part of the inner circle of a G-anything. Attempts to widen the group to G20 ended in failure as in such a large gathering of such disparate nations it proved to be roundly impossible to agree on anything.
We might laugh at the concept of Brazil and Venezuela or Iran and Saudi Arabia, let alone China and India, being in the same room and pulling in the same direction. But then again, the Soviet Union and the United States fought on the same side, even if not together, in the Second World War. By 1948, America was in bed with Germany and an iron curtain had gone up across the European continent. Things can be deeply frustrating and change very quickly in geopolitics, as the West has found to its detriment as it failed to find wider buy-in into its unqualified support for Ukraine in the aftermath of the Russian invasion.
Although represented in situ by foreign minister Lavrov, Vladimir Putin spoke to the assembly by video link, excusing himself as being held back by military matters. The pending international arrest warrant was of course not mentioned. Whether the military matter on hand might or might not have been the imminent neutralisation of Yevgeny Prigozhin – whether dead or alive, he’s a goner – will be for history to decide although as far as those present in Johannesburg are concerned it doesn’t really matter. Whether the date for Prigozhin’s removal from the stage was chosen to coincide with the BRICS convocation or was entirely circumstantial remains a moot point.
Joseph Stalin, Vladimir Putin’s declared idol, would have given his front teeth to be able to shoot the entire leadership of a rogue movement out of the sky rather than having to go through the pain of show trials and a fiction of law and justice. It’s going on 18 months since Russia invaded Ukraine with staggering incompetence. I recall how at the time our liberal press was busily hyping up Russian domestic opposition to the invasion. Western camera crews would record a few dozen or maybe even a few hundred anti-war demonstrators on the streets, then try to make us believe that the entire country was about to brought to a standstill and that Putin was close to being deposed by a bunch of peaceniks in order to secure the supply of iPhones and Big Macs. Well, that didn’t work out, did it?
The G7 is about pursuing political unanimity in order to back economic objectives. The BRICS + whoever will be the other way around. Its principal objectives are political and its economic ones secondary. Unless we, the West, grasp that, then we risk finding ourselves on the wrong side of history in the same way as we did when we treated post-Soviet Russia as nothing more than a convenient export market for exploitation of. With less than 10% of the global population, the G7 currently represents rough 43% of global GDP. BRICS + whoever might rightly assume that they are no longer entirely dependent on the G7 as both producers and consumers of anything and everything. The objective is to formalise the rise of the best of the rest.
Those who followed the first Trumpless Republican candidate’s TV debate will have noted the performance by Vivek Ramaswamy. Ramaswamy shone by expressing thoughts that must not be expressed. Placing troops on the Mexican border caught the headlines more than his suggestion that the time for “realpolitik” might be close and that maybe Ukraine will have to concede some, if not all, of the disputed ground. Don’t many of us feel that way? It is estimated that between them, Russia and Ukraine have conceded half a million casualties. It is not quite the Western Front, although the comparisons are not that far away. The front is moving by no more than hundreds of metres at a time and the talk all summer has been of Ukraine’s elusive “Big Push”. The Ukrainian counteroffensive resembles England’s summer.
This week, Vlad the Invader has in both his address to the BRICS conference and in his ruthless disposal of Prigozhin made it quite clear that he will not be the first one to blink. Maybe, as unpopular as the mere thought is, Ramaswamy might be right for us to start thinking about blinking.
Alas, it’s that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. Late Summer Bank Holiday weekend in this country. On Tuesday we return to the conundrum of how to stall the shift of cost-push inflation into wage related demand driven price increases. We have to face a German industrial economy which is struggling to adapt to a paradigm shift in global output. France has to decide what it wants to be when it grows up and whether the 6th Republic is called for. Meloni’s Italy continues to play possum as it steadfastly refuses to open its eyes to its own fiscal woes. China has a mountain to climb if it wants to stop its real estate sector from sinking into the swamp. And America tacitly knows that it can rely on Donald Trump’s legal fees to boost GDP ad infinitum. If you think the world is mad, you’ve seen nothing until you look at Brighton topping the English Premiership table, albeit only two games into the season but it still makes a good story…
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