2017/02/15 Commentary: Greece (again)? European Kool-Aid
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Commentary: Wednesday, February 15, 2017
Greece (again)? European Kool-Aid
It all has a sense of déjà vu… again. That is true for yet another round of Greece needing more financial support to avoid debt default as well as Fed-speak on multiple future rate hikes from early in the year. Yet the latter is now based more so on the US economic and financial reality than the Fed’s previous heavy ‘normalcy bias’ we have discussed at length in 2015 and 2016 posts. On the other hand, the Greek situation is a recurring nightmare that revolves around the European version of America’s Kool-Aid Crisis (see our January 14th post of that title.) While the highly partisan divide in the US seems to only be getting worse and worse on the Left’s resistance against the Trump administration, Europe has had its own ongoing state of denial.
We’ll revisit that shortly, yet feel it is of note that two days of testimony from Fed Chair Yellen have brought a much better chance of multiple further FOMC rate hikes in 2017. Right from her opening statement she laid out the case for further economic growth and higher inflation. However, rather than elicit a negative response from US equities that might have been expected previous, the equities are thriving. And that is precisely because the Fed is now indeed facing improved US economic performance that is consistent with somewhat better global growth.
This has not been the typical situation over the past several years, as there were problems elsewhere whenever the Fed might seem ready to hike. As noted in last Wednesday’s Commentary: The Ultimate Kool-Aid? post, the latest OECD monthly Composite Leading Indicators (our mildly marked-up version) mean OECD is now more realistically taking an upbeat view on most of the global economy. And for all of the dread over rising inflation, you can bet that the central bankers are all quietly cheering the Trump administration’s further economic stimulation plans. As noted in many previous central bank comments, they are much better at combatting inflation than deflation.
And the market responses have been as dramatic as they are thoroughly predictable as US equities push up sharply on improved data since late last week along with the new President’s commitment to laying out his tax reform plan fairly soon. There doubters point out none of this is anywhere near being passed into law. They ignore the classical axiom that “the market is a creature of expectations.” That is also true elsewhere…
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