The main target at G-20 will presumably be China

Outlook:

The sentiment linkage between oil prices and equities and currencies is a terrible thing. It’s like payrolls—the worst conceived and calculated data point driving sentiment about the whole economy. Oil is notoriously volatile and has been for 100 years. The producers and the traders are flighty and prone to silly deductions and actions against self-interest. It was foolish for the Saudis to stick to high output in the name of market share and even sillier to propose an output freeze contingent on other parties agreeing when those other parties were obviously never, ever, going to go along.

It’s like a bunch of 8-year olds are running this market and thus, because of linkage, the whole world economy. Case in point: the official EIA inventory report yesterday showed less of a rise in the latest week than the API report had shown the day before, driving Brent to an immediate 88¢ rally. The stock-pile is still at a record high, as expected, but because expected, evidently not a factor. Go figure. And if you look at the chart, the price of Brent is more congestive than anything else. The range over the past month is ta high of $36.77 on Jan 28 from the low of $29.92 on Feb 11.

We really do not want to be in thrall to this particular crowd. Another crowd we are not happy about is the one calling for a major initiative at G-20, including the IMF. Lagarde called for massive, coordinated fiscal action and more coordination on monetary policy, too. She said “Whether you look at the U.S. monetary policies, the Bank of Japan, or the [European Central Bank], the asynchronicity of those movements will have to be better reviewed, anticipated, and coordination certainly enhanced.”

The WSJ has a chart of major currency market events (Plaza Accord, etc.) that we are not copying here because it has no meaning. What does have meaning is that efforts to get “coordination” are doomed from the start because somebody has to take actions against the best interests of its own economy for the sake of the greater good of the global economy.

The only time this has actually happened, as former Fed Volcker pointed out, is when Japan changed interest rates in the 1970’s to suit the rest of the world. It didn’t turn out so well for Japan, not least be-cause European central banks refused point-blank to do the same. The Plaza Accord had as its chief goal getting the dollar lower and it worked, eventually, all too well. A few years later these geniuses had to get together at the Louvre Accord to make it stop falling.

And let’s not forget that an big, fat unspoken goal of “coordination” is to get exchange rates where they suit the needs of the weakest economies—but heaven forbid anyone suggest a big, fat one-time devalua-tion lest it been seen as currency war. In other words, the prescription is currency war to avoid currency war. It’s ridiculous. “Coordination” means a gang of countries telling some other countries what polices to undertake, whatever their political or ideological beliefs. You would have Keynesians dictating to non-Keynesians. Imagine (or remember) how the US feels when the IMF or some other party says US poli-cy is wrong. The US response, and properly, is “Go take a long leap off a short pier.”

The main target at G-20 will presumably be China. And China knows it. Yesterday it announced that all foreign institutional investors will now have access the country's interbank bond market. This might bring in foreign capital to offset domestic capital outflow, as well as promote the yuan as a reserve cur-rency. Yeah, sure. The absence of clear policies on so many things, including the yuan, is going to make this process a long, hard slog.

One instance of clarity worth noting is a comment from an HSBC economist, who said “Capital out-flows are increasing but it is not all due to bad reasons. By our estimates 60 per cent of outflows over the past 18 months came from Chinese corporates paying down their dollar debt at a time when Chinese borrowing costs are lower and the US is hiking rates.” Golly, why can’t the PBOC just come right out and say so, and at the same time reserves are being reported? Remember that las time, China reported the PBOC numbers but did not include the private bank numbers. Vice FinMin Zhu admits more transparency would be a good thing. He favors policy coordination, especially with the US. But Zhu is just one guy and not the guy in charge.

One point we can make—the Fed is never, ever going to take marching orders from State or the Treas-ury, let alone the IMF or G-20. But we are starting to get “delay, delay” signals from individual Feds, the latest being St. Louis Bullard, normally a hawk, who said yesterday inflation expectations are falling and that should give the Fed pause on the next hike. Today he apportions blame to the Fed for the latest stock market decline, not because the Fed hiked in Dec but rather because over the year, the Fed hikes in a straight line and has trained the equity market to expect a “freight train.” Bullard seems to have forgot-ten oil and China in this little story.

So now we are back to expecting almost nothing from the Fed in March. The idea still lingers that may-be June will see a hike. But at least nobody is talking about back-pedaling. Yet.