Yesterday the RBA cut rates here by 25bps and even though 9 out of 25 economists polled by Bloomberg predicted it there was still a sense of mild surprise to the market. I'm sensing that RBA Governor Stevens is fast falling for the Bernanke / Draghi trick that announcing a change in policy via carefully considered action is not enough and that somehow like a petulant 2 year year old you need to be dramatic to get the attention you deserve. In the case of Stevens he needs the positive attention to offset the filth pile he has presided over as journalists delve deeper into the bribery allegations surrounding the RBA's sale of banknote printing technology to several Asian countries. Either way the Aussie dollar hit the wall and headed towards the 1.02 level which has been a point of support over the European summer.
My view is that after some horrible manufacturing numbers on Monday when the Australian manufacturing sector contracted for a sixth consecutive month as the AIG Manufacturing Index for September came in at 44.1 down from 45.3 in August that Stevens now did not have the excuse of an offsetting and inflationary Chinese demand bubble to excuse him from cutting rates and dealing with an over-valued dollar. Chinese manufacturing in September via the Chinese Manufacturing PMI data came in at 49.8 which athough higher from last month’s reading at 49.2 was still signaling contraction. I see anothe Australian rate cut before the end of the year. Stay short the AUD.
Bernanke of course just can't help himself as exemplified by his speech in Indiana where he said the Fed would keep rates low even after the economy started to recover. I haven't read the full text of the speech. The speech can be found on the Fed's website here. Bertnanke asked himself 5 crucial questions:
- What are the Fed's objectives, and how is it trying to meet them?
- What's the relationship between the Fed's monetary policy and the fiscal decisions of the
- Administration and the Congress?What is the risk that the Fed's accommodative monetary policy will lead to inflation?
- How does the Fed's monetary policy affect savers and investors?
- How is the Federal Reserve held accountable in our democratic society?
In this exchange from 19 July 2012 I believe Paul put his finger on the essential problem, that is that the problem with the economy is not about liquidity, rather it's about solvency. Of course ultimately auditing the Fed would show this, but just as obviously Bernanke should point this out and get the Congress to deal with this aspect of the problem. The so-called fiscal cliff that is fast approaching is the exemplar of the way the US legislature has abandoned its duty to deal with solvency. The recovery is there in the US, it just needs some rational policy help.
Alternative thinking is always welcomed by this blog, but of course the alternatives need to be somewhat sane. Close to half a million French people live in and about London. You have very little chance of getting your teenage child into the French language Lycée Français Charles de Gaulle in South Kennsington. Why is this so . . . well it's mainly about the lack of opportunity available in France to young aspiring entrepreneurs. Leaving aside the ridiculous 75% tax rate recently introduced on the mega wealthy, the French have attacked the main engine of job creation in the country by the government’s plan to tax capital gains at the same rates as earned income. The FT reports that Jean-David Chamboredon, chief executive of ISAI, a venture capital fund, and leader of an investors’ lobby group called France Digitale, as saying that the result in some cases would be a jump in the effective marginal tax rate to as high as 60 per cent from 32 per cent for investors and entrepreneurs selling out of a business. Who wants to live in France?
I'd gladly cycle in France again as drivers there appreciate a fine bicycle. My trip to the hills (max elevation approx. 1050m) near Sydney on the weekend did remind me somewhat of my adventures deep into the Haut-Savoie just 45min from Geneva. If it wasn't for the wind my Cannondale would still be on the road now . . .
Perhaps when the Bernanke stops printing I'll use my air miles to return to France . . . and so might the French citizens of London.