Cellphones, Facebook, Tesla, and booming markets: Have we reinvented the Roaring Twenties?

The pandemic has moved the new technologies of the last two decades into the center of life with astonishing speed. Cellphones are no longer just a supremely convenient communication device but the organizing node of existence.  Markets especially equities, reflect this evolution.  Yet the institutions that order economic life, government and central banks, are slow to respond to changes and operate with tools founded in a different era. Our pandemic year has seen more concentrated social change than any era since the advent of consumerism in the 1920s.  Can markets continue to operate on last century's models? Join senior analysts Yohay Elam and Joseph Trevisani for an examination of the implications of our interesting times.

Yohay Elam: The ECB has just left its policy unchanged but pledged to ramp-up its pace of buying bonds. Will that convince markets?

Joseph Trevisani: I don't think so. The basic difference between the Fed and the ECB and the economies they oversee cannot be elided by the policy. The Fed expects a robust recovery, even if it is reluctant to say so specifically yet, and the ECB does not. Low-interest rates do not create growth, they facilitate.

Yohay Elam: The ECB has a weak economy.

Joseph Trevisani: And an aging population.

Yohay Elam: So perhaps it will succeed in lowering yields?

Joseph Trevisani: Like Japan low growth is endemic.

Yohay Elam: And a slow vaccination and sluggish rollout of fiscal support. Europe = slow.

Joseph Trevisani: But excellent food. Not to be flippant, but a return of tourism would help. It would bring immediate cash into the economies.

Yohay Elam: Barcelona is reeling from the hit to tourism, and that applies to most of Spain, Italy, and Greece.

Joseph Trevisani: Yes. NYC is in a similar leaky boat.

Yohay Elam: If euro yields remain depressed, can we expect the euro to extend its losses?

Joseph Trevisani: I think so. Interest rates have the strongest long-term relation to currency movement.

Yohay Elam: Yep, fundamentals rule, and interest rates are the most fundamental of fundamentals

Joseph Trevisani: At the moment the euro is below its ECB announcement level. And exactly. The rules of economics have not been repealed.

Yohay Elam: The ECB is not the only central bank fighting higher yields. But it is moving slowly. The RBA didn´t talk, it just moved.

Joseph Trevisani: Despite the influence of the Bundesbank, the Fed is a far more conservative institution than the ECB.  But then, its political situation permits such an outlook.

Yohay Elam: I think the BOJ is the most innovative, but not necessarily the most successful

Joseph Trevisani: If you judge by economic growth Japan has done poorly.

Yohay Elam: Indeed, the pioneers in QE and negative rates proved these ideas have their limits. But as you've mentioned, an aging population and other factors are in play.

Joseph Trevisani: Central banks have essentially one tool, interest rates, QE, and negative rates are just variations when old-fashioned settings like the fed funds are incapacitated.

Yohay Elam: Yeah, innovative extensions.

Joseph Trevisani: Japan is a shining example of the futility of negative rates.

Yohay Elam: Europe is not as shining, but it hasn't been a huge success. I'm surprised the BOE was considering it.

Joseph Trevisani: There are enough examples of negative rates to provide an empirical assessment. I cannot think of one success.

Yohay Elam: Maybe in small countries, but again, I haven't seen a poster child of negative rates.

Joseph Trevisani: There is a bureaucratic imperative nowadays for central banks to act, even if doing nothing might be a better solution.

Yohay Elam: Indeed, and now they are judged by their reaction to rising yields.

Joseph Trevisani: Greenspan in the US began the cult of the omnipotent banker. It has not aged well. Though I do think the Fed's response to the pandemic was correct and timely. But given the natural ability of the US economy to recover faster it is difficult to tell where the Fed assistance stops and the economy begins.

Yohay Elam: It is all one big continuum channeling Lagarde's holistic messages.

Joseph Trevisani: US equities are approaching euphoria. I think markets are taking their lights from the fast-spreading state economic openings. I am always a bit puzzled by holistic approaches. I'm never sure what they mean aside from we are looking at all and doing all we can.

Yohay Elam: I think the recent rise is a mix of several factors: stimulus approval, low inflation, ongoing Fed support Goldilocks. Powell's approach to yields is only hawkish in comparison to the ECB. All in all, the Fed is supportive.

Joseph Trevisani: True, but behind that is the assumption is that they will work, that is the economy will take off. That is true, but that is the only comparison that matters, there are no economic absolutes.

Yohay Elam: Everything is relative. And holistic. If we rank central banks' responses. The ECB is in the dovish camp and the Fed in the hawkish one. I would put the BOC with the Fed, as Canada's economy is tied to America's.

Joseph Trevisani: I think some of the speculations in the equities is fueling the rise of cryptocurrencies and the intense social media interest in individual stocks

Yohay Elam: Indeed, money is sloshing around, looking for excitement there are also NFTs.

Joseph Trevisani: It was interesting to see the Reserve Bank of Australia say that rates will be low until the end of 2024.

Yohay Elam: The RBA is intervening aggressively while the economy is booming. The Fed and ECB moves make more sense.

Joseph Trevisani: If any economy will benefit from a global recovery is Australia's.

Yohay Elam: Indeed. Australia is the bellwether of "risk."

Joseph Trevisani: Precisely. One wonders if globalization is still the powerful disinflationary force on prices.

Yohay Elam: Deglobalization is, in theory, underway.

Joseph Trevisani: It is hard to assess if Trump's aggressive approach to.

Yohay Elam: But it will likely be a protracted process.

Joseph Trevisani: China, and by default, globalization, has made permanent changes.

Yohay Elam: China is gradually moving onto more advanced technologies, they're competing in AI for example. While clothes are made in Bangladesh. I think globalization is still a prominent force, even if the US and China will not be the best of friends. Globalization has gone global... Samsung makes many of its products in Vietnam.

Joseph Trevisani: It certainly has. Have I told my stories of visiting Shanghai in 1986? Well, perhaps another time.

Yohay Elam: Shanghai 1986, I guess the picture you've taken there doesn't resemble how the city looks now...

Joseph Trevisani: No camera, and rather pre-cell phone. Not a single selfie. You are right, China is moving to advanced industrial status.

Yohay Elam: We have mentioned the Fed but have not discussed their upcoming meeting. I can bet it will not be holistic.

Joseph Trevisani: No, we will have to come up with a better term.

Yohay Elam: Powell is more of a straight talker, but I suspect he'll dodge questions about the desired yield on the ten-year Treasury...

Joseph Trevisani: I am sure he will. But his view is clear, higher rates, within reason (undefined of course) do not threaten the US recovery. I think is he correct.

Yohay Elam: Indeed.

Joseph Trevisani: In addition, and also unstated, is the truism that higher rates will act against any inflation without the Fed having to take official notice or change their low rates policy. The FOMC, could if it was concerned, direct purchases to a different part of the yield curve.

Yohay Elam: Indeed, the market is doing the Fed's work at keeping long-term borrowing costs in check.

Joseph Trevisani: Yield curve control means never having to tell.

Yohay Elam: I think they would rather avoid yield curve control as long as they can.

Joseph Trevisani: Agreed.

Yohay Elam: The Fed will probably upgrade its growth forecasts and stress that too many Americans are out of work. That would be a fine balancing act

Joseph Trevisani: It becomes the self-financing trap of the BOJ. The government issues debt on one side and buys it on the other.

Yohay Elam: Exactly, YCC is so BOJ, and the Fed would not want to walk that path.

Joseph Trevisani: Mr. Powell has been adept. I like that YCC is so BOJ. Very text was worthy.

Yohay Elam: Indeed, he's been doing a good job.

Joseph Trevisani: And more importantly a failure.

Yohay Elam: Do you think the Fed will succeed in maintaining a fine balance? I don't think Powell wants markets to crash nor party.

Joseph Trevisani: Judging by past performance. I think so. The stimulus checks will be spent and that will rev up growth.

Yohay Elam: Vaccines, Fed support, stimulus, and perhaps infrastructure spending worth $2.5 trillion. Party in the USA.

Joseph Trevisani: From there it becomes more problematic.  The US debt may become an issue, though given the Japanese example and the lack of alternatives probably not, perhaps because if it did it would be a systemic issue. I don't see inflation as more than a temporary issue, globalization still rules the price roost. I'm tempted to draw the Roaring 20s comparison, but that ended badly.

Yohay Elam: Debt worries is so 2011. Indeed, roaring 20s, although it may end in tears before the end of the decade. I think there are three years of partying.

Joseph Trevisani: There is the parallel of the impact of new technologies which is very similar.

Yohay Elam: Technological developments were amazing in those years. Do you see AI or other developments at a similar scale?

Joseph Trevisani: I see the parallel in the impact on life.  Cars, household appliances, the telephone had a tremendous effect on life in the 20s for the first time. Cellphones and social media have had a similar impact over the past decade, reordering our personal lives in a dramatic fashion. Very little has been spared.

Yohay Elam: Tech is everywhere.

Joseph Trevisani: Markets reflect these changes, they do not initiate.

Yohay Elam: Tech makes everything more accessible. It makes trading easier. Including newbies.

Joseph Trevisani: Plus ca change, plus c'est la meme chose.  In honor of Ms Lagarde.

Yohay Elam: Eh oui.

Joseph Trevisani: The more things change the more they stay the same.

Yohay Elam: Indeed, so the Fed will likely keep things the same, what about the BOE?

Joseph Trevisani: Yes and so will the ECB.  No change for Threadneedle Street.

Yohay Elam: Where is the BOE when it comes to yields? It seems to lean towards the Fed, albeit quietly.

Joseph Trevisani: It has many of the advantages of the Fed, a unified and more flexible economy, a unitary government, and a better vaccine rollout.

Yohay Elam: Indeed, and therefore unlikely to put up a fight against rising yields.

Joseph Trevisani: The BOE and the Bank of Canada were the only central banks to follow the Fed's lead in attempting to normalize rates in the last decade. Higher rates are a positive economic development. But that message seems lost on many central bankers, or at least they are afraid of expressing it. But I have a hard time believing they do not know it.

Yohay Elam: It's hard for these institutions to shift gears from buying more and more bonds to allowing their value to drop. Like traders unwilling to exit a losing position.

Joseph Trevisani: Yes the old trading adage. When you learn how to lose you will know how to win.

Yohay Elam: Words of wisdom.

Joseph Trevisani: Almost a koan.