If anything the Bank of Canada should ease monetary conditions

While the Federal Reserve – rightly or wrongly – has initiated a rate hiking cycle it is not given the the central bank in neighboring Canada should follow suit. In fact, according to our our composited indicator for Canada monetary conditions monetary policy is too tight for the the Bank of Canada to hit its 2% inflation over the medium-term.

The Bank of Canada will announce its rate decision on Wednesday and we should stress that our indicator does not say what the BoC will do, but rather what it ought to do to ensure it will hit its 2% inflation over the medium-term (2-3 years).

Four key monetary indicators

In February we – Markets & Money Advisory – will start to publish our Global Monetary Conditions Indicator covering monetary conditions in around 30 countries around the globe. Canada is one of that those countries.

In the Monitor we will publish a composite indicator for monetary conditions in each of these 30 countries and indicator will be based on four sub-indicators – broad money supply growth (typically M2 or M3), nominal GDP growth, exchange rate developments and the level of the key policy rate.

For these four sub-indicators we define what we call a policy-consistent growth rate, which mean that this would be the needed growth rate of for example M2 or nominal GDP to ensure that a given central bank hits its inflation target over the medium-term given the development in factors outside of the direct control of the central bank – for example money velocity, trend real GDP or foreign price developments.

The composite indicator is then an weighted average of these four sub-indicators and the indicator is calibrated so that a zero score in the indicator indicates that it is likely that inflation will be in line with the inflation target (in the case of Canada 2%) within the next 2-3 years.

Below you see the four sub-indicators for Canadian monetary conditions.

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Overall, we see that while broad money supply growth (M3) is broadly in line with the policy-consistent growth path the three other indicators have been on the “tight side” for the past 1-2 years.

At the root of this excessive tightening of monetary conditions likely is the fact that the drop in global oil prices, which started in 2014 caused the Bank of Canada to essentially hit the Zero Lower Bound on interest rates and as the BoC (so far) has refused to implement monetary easy though the use of other instruments – for example intervention in the FX market – monetary conditions have more less “automatically” become too tight since early 2015.

This is very similar to the development in other countries with otherwise successful monetary policy – Norway and Australia – where monetary conditions also have been tightening excessively over the past 1-2 years.

BoC likely to undershoot its inflation target in the medium-term

The graph below shows our composite indicator for Canadian monetary conditions.

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We see that the indicator has been trending downwards since early 2014 – indicating a tightening of monetary conditions and since early 2015 the indicator has been below zero indicating downward risks relative to BoC’s inflation target and recently the indicator has dropped below -0.5.

We overall define the range from -0.5 to +0.5 to be ‘broadly neutral’ monetary conditions. Hence, presently monetary conditions are excessively tight.

Concluding, it might be that the Federal Reserve will hike interest rates further in 2017, but the Bank of Canada certainly should not be in a hurry to hike rates given the fact that monetary conditions presently are too tight to ensure that the BoC will hit its inflation target in the medium-term.

In fact, the most important issue for the BoC seems to much more clearly articulate how it plans to conduct monetary policy at the Zero Lower Bound. A possibility would be to use the exchange rate as a intermediate target/instrument to implement an easing of monetary condition at the Zero Lower Bound. See more on this here and here.

However, one thing is what that BoC ought to do another thing is what the BoC will do and we should stress that the purpose of our Global Monetary Conditions Monitor is not to forecast monetary policy action, but rather to evaluate in a consistent and objective way the monetary stance of a given country such as Canada.

Finally, stay tuned for the publication of our Global Monetary Conditions Monitor in February. For inquiries please drop us a mail (LC@mamoadvisory or LR@mamoadvisory.com).

We are launching a Youtube channel

We – Markets & Money Advisory – will soon be launching a new website. As part of that the blog format will also be “updated” so that not only will it be possible to read blog posts, but we will also put out movies etc.

This will all be available on the website, but we will also be launching a Youtube channel from, which to stream these videos etc.

You can already now go in and check out this Youtube channel. See here and please subscribe.

On the Youtube channel you will already now find old interviews with me and presentations I have done. These kind of things will also be added in the future. Furthermore, it is the plan to do a lot more “real-time commentary”, which will be small videos with me commenting on particular monetary policy events and major market action. We might also in the future produce small tutorials and “learners”.

If there is something particularly you would like to see on our Youtube channel please comment in the comment section below or on the Youtube channel.

Looking forward to 2017 – plans for M&M Advisory

2016 was a busy year for me. It was the second year as my “own man”. I am very happy about how things have developed.

I set out to do three things when I started Markets & Money Advisory back in the summer of 2015.

First, of all I wanted to do a lot of public speaking. I have continued to do that in 2016 and will certainly continue to do that in 2017. So if you want to book me for a speaking engagement anywhere in the world drop me a mail (LC@mamoadvisory.com) or my speaking agent Daniel Rix at Specialist Speakers (Daniel@specialistspeakers.com). In 2016 I spoke a lot about Trump and Brexit – and of course monetary policy and global markets. In 2017 I guess focus will turn to European political uncertainties with elections in France and Germany and surely I will also talk about my favour topics – monetary policy, global financial markets and I certainly hope to be back in Africa speaking on the prospects for this continent.

Second, I wanted to do more commentary and I have certainly done a lot of that. I writing regularly for four European newspapers – Børsen in Denmark, Frettabladid in Iceland, Gazeta Prawna in Poland and finally Il Foglio in Italy. Furthermore, I have also regularly contributing Geopolitical Intelligence Services. I enjoy my regularly commentary a lot, but the consequence of writing for other media than my blog has also meant that I have blogged less on The Market Monetarist than I have done in previous years. Hence, in 2016 I only wrote 77 posts on this blog. My ambition clearly is to do more blog posts in 2017 than in 2016, but the format will also change a bit. More on that below.

Third, when I started Markets & Money Advisory the ultimate goal was to do advisory particularly on monetary policy issues. I am very happy that the advisory business has continued to grow in 2016. Most of our business has been in North Africa and the Middle East and I certainly expect that to be the case in 2017 as well, but I certainly expect the advisory business to grow more in 2017.

The positive development in the business has meant that I had to change the business from being a one-man army and move from the home office to new offices in Copenhagen. During 2016 I also brought on two assistant analyst to help me – Laurids Rising and Christian Schoubye. Laurids is primary do research assistances, while Christian will be helping on communication and social media.

So all in all 2016 was a busy and interesting year for me and for Markets & Money Advisory.

Plans for 2017

2017 hopefully will be equally busy and interesting. A lot of people have noticed that Markets & Money Advisory still does not have its own website. The Market Montarist so far has functioned as company website, but that will soon change. Hence, in January or February we will launch a new website for Markets & Money Advisory.

I should stress that that does not mean that the blog will disappear. Rather the blog will be incorporated into the new website.

On the new website it will be possible not only to read the blog, but also be able to book speaking engagements and hear about our advisory services.

Furthermore, we will start a “research shop” on the website where we will be offering our new research products. The first research product we will launch will be a monthly publication on global monetary conditions – The Global Monetary Conditions Monitor. The Monitor will cover monetary conditions in around 30 countries around the world. We are very optimistic about the prospects for this publication. I have earlier written about our plans for the Monitor here and here. If you are interested in this product please drop me a mail (LC@mamoadvisory.com).

We hope also to launch other research products in 2017 – we have not yet decided on what specific publications to launch, but given our advisory work in the Middle East and Northern Africa I would certainly not be not surprised if we for example would launch a quarterly publication on the MENA economies and markets at some time during 2017. If you have suggestions and requests for other research product please let us know.

Another concept we are presently working on is white-label research. This means that we will be offering for example smaller financial institutions to do research for them, which they can share with their clients using their own logo and name. I am happy to talk to potential clients about this so feel free to drop me a mail.

I have had this blog since 2011 and I continue to enjoy blogging and that will continue in 2017. However, I can also see that the world of blogging is changing. Therefore, in 2017 we will try to add other forms of communication. That could for example be webcasts, conference calls, small movies, tutorials etc. Do you have other ideas? Let us know!

Furthermore, we will try be more focused on sharing my commentary, which I write for example different newspapers on the blog as well. Obviously a lot of it is not in English, but at least we will try to a weekly wrap-up of both the commentary as well as links to media appearances and presentations etc. We will also share some of my powerpoint presentations from different presentations I do around the world to the extent that is possible.  All in all the blog will develop in lot more dynamic direction when we launch the new website.

I or we? 

Writing a blog is a very personal thing and the format means that you will use “I” rather than “us” or “we”. Another thing is a company website, which means that you will see a lot more “we” than “I” going forward. That does not mean that the focus on money and markets will change and the “method” will very much continue to be market monetarist. That is after all the comparative advantage of Markets & Money Advisory, but it also means that in the future there might be more contributors to the company website – primarily of course Laurids and Christian to begin with.

Looking for international partners and new ideas

As the advisory business has been growing it from time to time has been necessary to bring in external economists for our advisory projects and I certainly expect that that will be the case going forward. Therefore, if you are an independent economist in any country in the world and you think that you could be able to contribute on projects in the future then we are happy to hear from you. You might even have an advisory project that you think that we could contribute to.

Finally, I want to thank my readers for the loyal support in 2016 and I look forward to share a lot more thoughts on monetary matters – and the markets – in 2017. And if there is anything that you are looking for please let me know. What would you particularly like to see from Markets & Money Advisory and myself in terms of blogging, commentary, research products etc.?

 

 

 

The end of the Trump rally?

I generally don’t think I can beat the market, however, right now there is something, which worries me and that is that the “Trump rally” in the US stock market could be about to end.

It seems to me that what US stock market investors are really focusing on is the potential for deregulation and tax cuts (and infrastructure investments). And we might of course get that and deregulation and tax cuts and certainly should be welcomed news both for the US economy and the US stock markets.

But if you get supply side reforms then it will be because of the Republican majority in the House and the Senate (might) want this – not because of Trump. Trump continues to pay lip service to these ideas, but he has certainly not be consistent. There is nothing in Trump’s past that tell us that he is a “free market guy”.

Where he has been consistent – even very consistent – is on his protectionist message and his China bashing. Presently the markets are ignoring this and that might not be the wrong thing to do, but I must say Trump’s 35% tariff talk scares scares me a lot and so does his persistent attempt to “pick a fight” with China.

Another factor, which could spell the end of the “Trump rally” is that not only will the Federal Reserve hike interest rates next week, but the FOMC could also send a more hawkish signal than presently being priced by the market.

In this regard I would particularly focus on inflation expectations, which essentially have stopped rising since 5-year/5-year breakeven inflation expectations broke above 2% a couple of weeks ago. Meanwhile the US stock markets generally has continued to trade (moderately) higher. To me that there seems to be a bit of a disconnect.

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Hence, investors expected some Trumpflation as long as (medium-term) inflation expectation, where below 2%, but from here on investors are likely to increasingly think that there will be full monetary offset of any “fiscal stimulus” from the Trump administration.

So did I just say that the “Trump rally” might soon come to an end? I don’t know and I am not giving investment advice here, but…

John Allison just endorsed NGDP targeting

On Monday Donald Trump met with John Allison the former CEO of the BB&T and former CEO of the libertarian think tank The Cato Institute.

It has been suggested that Allison might be in the running to become new US Treasury Secretary.

Allison is widely known to be an staunch advocate of deregulation of the banking sector and in favour of a rule-based monetary policy. Many had taken his support for a rule-based monetary policy to mean that he favours a gold standard.

However, Allison ultimately would like to see a Free Banking system in the US, but also acknowledges that that is not realistic anytime soon. Instead watch what he says on this interview on Fox & Friends.

“We need discipline, we need somekind of rule, I like the Taylor rule, I like some kind of GDP indexing rule…”

There you go – John Allison who might become next US Treasury Secretary just endorsed Nominal GDP targeting.
Further than that Allison obviously strongly supports scaling back Dodd-Frank. Something I also strongly believe in.
So concluding, if John Allison supports NGDP targeting and significant deregulation of the financial sector I would  – for what it is worth -endorse him as US Treasury Secretary anytime and it certainly helps that I know that he would be strongly against any protectionist measures presently being discussed by the Trump camp.
HT George Selgin.

PS If I had been John Taylor I might chosen the title “John Allison just endorsed the Taylor rule” and that would have been equally correct. The point is that we now have a potential future US Treasury secretary who is open-minded and well-informed enough to serious be thinking about NGDP targeting. That is good enough for me.

Highland Capital's Tom Stemberg Speaks On Economy At The National Press Club

Themes and Scenario for 2017

At Markets & Money Advisory we have tried to think a bit about different themes and scenarios for the global economy and markets in 2017. What is more likely? We don’t know and this is not investment advice, but it might help investors and policy makers to think about risks and opportunities.

I you want to know more about Markets & Money Advisory’s research agenda and research products please contact me Lars Christensen (LC@mamoadvisory.com).

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Stephen Bannon – Nationalist Keynesian

This is president-elect Donald Trump’s Senior Counsel Stephen Bannon:

I’m not a white nationalist, I’m a nationalist. I’m an economic nationalist…

…Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement….It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.

Something is seriously wrong with a guy saying “as exciting as the 1930s”, but it is yet another confirmation that the Trump administration is likely to pursue rather vulgar Keynesian policies. It can’t be long before Paul Krugman is offered a job in the new Trump administration.

 

The Trump-Yellen policy mix is the perfect excuse for Trump’s protectionism

It is hard to find any good economic arguments for protectionism. Economists have known this at least since Adam Smith wrote the Wealth of Nations in 1776. That, however, has not stopped president-elect Donald Trump putting forward his protectionist agenda.

At the core of Trump’s protectionist thinking is the idea that trade is essentially a zero sum game. Contrary to conventional economic thinking, which sees trade as mutual beneficial Trump talks about trade in terms of winners and losers. This means that Trump essentially has a Mercantilist ideology, where the wealth of a nation can be measured on how much the country exports relative to its imports.

Therefore, we should expect the Trump administration to pay particularly attention to the US trade deficit and if the trade deficit grows Trump is likely to blame countries like Mexico and China for that.

The Yellen-Trump policy mix will cause the trade deficit to balloon

The paradox is that Trump’s own policies – particularly the announced major tax cuts and large government infrastructure investments – combined with the Federal Reserve’s likely response to the fiscal expansion (higher interest rates) in itself is likely to cause the US trade deficit to balloon.

Hence, a fiscal expansion will cause domestic demand to pick up, which in turn will increase imports. Furthermore, we have already seen the dollar rally on the back of the election Donald Trump as markets are pricing in more aggressive interest rate hikes from the Federal Reserve to curb the “Trumpflationary” pressures.

The strengthening of the dollar will further erode US competitiveness and further add to the worsening the US trade balance.

Add to that, that the strengthen of the dollar and the fears of US protectionist policies already have caused most Emerging Markets currencies – including the Chinese renminbi and the Mexican peso – to weaken against the US dollar.

The perfect excuse

Donald Trump has already said he wants the US Treasury Department to brand China a currency manipulator because he believes that China is keeping the renminbi artificial weak against the dollar to gain an “unfair” trade advantage against the US.

And soon he will have the “evidence” – the US trade deficit is ballooning, Chinese exports to the US are picking up steam and the renminbi continues to weaken. However, any economist would of course know that, that is not a result of China’s currency policies, but rather a direct consequence of Trumponomics more specifically the planed fiscal expansion, but Trump is unlikely to listen to that.

There is a clear echo from the 1980s here. Reagan’s tax cuts and the increase in military spending also caused a ‘double deficit’ – a larger budget deficit and a ballooning trade deficit and even though Reagan was certainly not a protectionist in the same way as Trump is he nonetheless bowed to domestic political pressures and to the pressures American exporters and during his time in offices and numerous import quotas and tariffs were implemented mainly to curb US imports from Japan. Unfortunately, it looks like Trump is very eager to copies these failed policies.

Finally, it should be noted that in 1985 we got the so-called Plaza Accord, which essentially forced the Japanese to allow the yen to strengthen dramatically (and the dollar to weaken). The Plaza Accord undoubtedly was a contributing factor to Japan’s deflationary crisis, which essentially have lasted to this day. One can only fear that a new Plaza Accord, which will strengthen the renminbi and cause the Chinese economy to fall into crisis is Trump’s wet dream.

 

We miss you Uncle Milty

10 years ago today – I was at a Christmas party with my then employer Danske Bank when we got the sad news. Milton Friedman my big hero had died.
I remember my parents telling me the next day that they had heard the news on TV. My dad had asked my mom whether they should call me about the sad news. Mom told my Dad “No, he is out for a Christmas party lets not ruin his night”. That is good parents – they were thinking of their then 35 year old son’s well-being, but it probably is also telling just how much Friedman meant and still means to me.
Milton Friedman is dearly missed. He would have spoken out against the nonsense central bankers continue to come up with and he would be in the forefront speaking out against Trump’s protectionist nonsense.

Update: My good friend Sam Bowman has a very good post on the Milton Friedman Agenda. See also Madsen Pirie video on Friedman here. It is easy to be proud of being part of the Adam Smith Institute family today.

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Lessons for today: The conflict between Reagan and Volcker

This is from the The New York Times on February 17 1982:

President Reagan and the chairman of the Federal Reserve Board, Paul A. Volcker, met Monday to discuss monetary and budget policy, Administration officals confirmed today…

… The official said that the meeting covered a broad range of economic issues, including monetary policy and budget deficits. But, the official said, the main reason for the session was to reinforce the ”personal relationship” between the two men. The two last met in December.

The meeting comes after recent tension between the Fed and the Administration, highlighted by the Administration’s contention that the Fed’s erratic management of the money supply was pushing up interest rates and Mr. Volcker’s response that it is the threat of large budget deficits that is affecting interest rates.

…Many economists outside the Government say that the Fed and the Administration are on a collision course on economic policy because the tight monetary policy promised by the Fed will not allow for the relatively strong economic growth the President has forecast will begin by the second half of this year.

Mr. Volcker in an interview Sunday said that he did not think the economy would come ”roaring” back, as Treasury Secretary Donald T. Regan predicted recently. In testimony last week before Congress, the Fed chairman also said he would not count on the Administration’s forecast of relatively strong economic growth for 1983.

…In response to questions about his meetings with the President, Mr. Volcker, in testimony last week, asserted his and the Fed’s independence over monetary policy. ”It is our responsibility to make up our minds about these things, and we do so. Forget about what the Administration says at the moment.”

Paul Volcker was no Arthur Burns and Reagan was no Nixon. In the case of Nixon/Burns Burns just did what Nixon demanded, while Volcker would not back down, but nonetheless avoided all out “war” between the Reagan administration and the Fed and Reagan understood that it was the right thing to do was to (mostly) respect the Federal Reserve’s independence. That said, the policy mix was very bad during Reagan’s two terms as president.

How will story play out between Yellen and Trump in 2017-18?

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