Things feel pretty good here in the good old UK; we are basking in the warm, rare, reflective glow of a new royal baby, sporting success (Murray, British Lions, Cricket…think rounders adapted by Woody Allen…..), the succulent green shoots of economic recovery, a new baby Governor of the Bank, a continued robust stock market, record low borrowing costs, AND… good weather. What could possibly go wrong ?
Lets start with the Bank. Mr Carney seems like a good chap. He is widely respected, Canadian, and he has an economy to nurture that is out of its sick bed, and wandering around the ward – leaving hospital is a realistic prospect, but not just yet. Perhaps the phrase most closely associated with him is `forward guidance`, and it is this that concerns me. In principle, it is great, but like the plans we make for ourselves and our families, when things go wrong, disappointment can be a fierce, sniping critic of the next strategy. So, if the `guidance` turns out to be at odds with the markets assessment of the inflation/growth balance, and is flawed – where does that leave the Bank ? It will be fiendishly difficult to reassure markets that – after an inaccurately crafted scenario – the next one will be OK. The Governor is of course aware of this, and I think you will find caveats in the guidance that will be resurected for the press should things go a bit Pete Tong. BUT, this in turn must water down the messages.
Stock markets worldwide are still running well. China is slowing down – we knew that, and indeed HOPED for that a couple of years ago – and the move towards a greater internal focus away from the fantastically impressive locomotive of growth that was cheap labour, is work in progress; interest rates are low and will continue to be that way for a couple of years yet, BUT we all know that this will change (sorry…normalise); we think we know that QE has been beneficial – BUT we know that this is sinking in the West; growth is mostly on the up BUT we expected that. Prices – be they exchange rates or Stock quotes, are never about what is happening now – they are based on expectations of the future v the unwinding reality of numbers. My point here is that a lot of the good news, in the UK and wider, is happening now. On the horizon there is growth, BUT it will have to learn to walk unaided – the crutches are being taken away….