It isn't called inflation nowadays, of course. There are still too many voters who remember the grim days of the 1970s and early '80s of 10%+ inflation and the harsh medicine applied to vanquish it at the time, so 'reflation' is the preferred term. Essentially, the world's central banks have been attempting, through ultra-loose monetary policy, to 're-flate' or ignite economic growth and subsequent inflationary pressures in the global economy since the banking crisis of 2008. The thinking has been that low rates will entice borrowing, growth and a resurgence of confidence in consumers over time. This has been the strategy since 2008, even to the extent of negative interest rates, and that this has largely been a failure is evident to all, so perhaps a different approach is needed.
Which brings us back to Mr. Trump. Monetary policy is out of ideas, so the incoming US administration is apparently committed to an aggressive fiscal policy coupled with deregulation and major tax cuts, both personal and corporate. This may not work or it could be wildly successful or, most likely, something in between – only time will tell. But it is a fact, however, that there is a mountain of corporate cash – in the trillions – sitting on the sidelines at home in the US and overseas in the form of unrepatriated USD profits which, under the proper reform of corporate taxation, could return home and be put to work. Moreover, one of the criticisms of the outgoing Obama administration was its over-reliance on monetary policy and its apparent indifference to ineffective or, at worst, harmful fiscal policy. Mr. Trump appears to be making the right noises about changing this. Investors are voting thumbs-up.
The on-again, off-again oil production talks between OPEC members continued in the headlines. The cartel has a general meeting slated for November 30th in Vienna and would like to have a production quota and pricing agreement in place by then. But Russia, the largest producer outside OPEC, is playing hardball, seeking to have a quota at its current production levels – which are at a record. Their argument is that, as Russian oil production is steadily increasing, a freeze at current levels amounts to a 'cut'. With such logic the cartel must deal, an unenviable task.
The bottom line is that a crude cut of around 1.9 million bbl/day would likely see prices rise to the high $50USD range, even assuming such a deal can be cobbled together in the next few days. However, as mentioned in our May 30th post, American frackers – who aren't bound to OPEC - stand ready to start producing shale oil in quantity should prices rebound to $60USD or better. So OPEC may think it can still dictate prices, but in the words of Steve Carell in 'The Big Short': 'Good luck with THAT'.
Elsewhere there wasn't much of note in the holiday-shortened week. Turkey and the EU exchanged sharp words over the slow progress of Turkish ascension to full EU membership. Eurocrats had expressed dismay at political suppression instigated by PM Recip Erdogan following the unsuccessful coup of last summer; Mr. Erdogan responded by threatening to release upwards of three million Middle East refugees into Europe. With elections set for next year in France and other EU states and a populist, anti-EU mood in the air, this is a serious threat, at least to Brussels.
Most currencies rebounded after the sell-off of the previous week, with traders booking profits before the extended Thanksgiving break. JPY continued to lag, as the Bank of Japan maintains its tight control of the Japanese Government Bond (JGB) yield curve as laid out in last week's newsletter.
Lastly, we refer our readers once again the US Dollar Index 'golden cross' and its current standing.
The 50 day moving average (in blue) continues to move up, up and away from the 200 day moving average. Having said that, we want to stree that the technical indicators are stretched so a pause in the uptreand is in order for the Superbuck – or some green Kryptonite perhaps? – but for now the bullish trend appears set.