TANGIBLE IDEAS

December 2014
Research Strategies Solutions

True Sinews
Silver alone is the true sinews of circulation

Sean Corrigan

True Sinews
True Sinews
December 2014

Four impossible things before breakfast

In this, the inaugural edition of our new work, we consider the merits or otherwise of chasing
into that trade of the moment, long Nikkei, short yen where a hedged index purchase works
strictly, has workedand a currency works but where both essentially represent the same mon-
ey illusion of Abenomics in action. We then expound on the typically under-emphasised influ-
ence of a credit inflation on commodity supply, rather than that of a simple inflation on imme-
diate commodity pricing and demand and contrast the cycle with that of equities.

Next we consider how the often reinforcing feedback between market price action and market
perception could keep oil under more pressure than many wish to contemplate and finally we
roll our eyes at the latest example of mainstream macromancy whereby the ECBlike the wild-
eyed BOJis terrified that you might actually enjoy a bargain as the result of its fall.

Red Queen Investing even without the implacable folly that is Kurodas and
Abes intent to relieve their fellow citizens of their sav-
It is rare these days to come across an investment man- ings by stealth.
ager or a strategist who will not proudly volunteer that
he is either Long the Nikkei, short the Yen, or is telling No, it is the first leg of the trade that makes no sense to
his clients to position themselves that way. us for the ugly truth is that, after an initial lurch up-
wards, the Nikkeiwhen measured in USDhas made
With all due caveats about crowded trades and the like, absolutely no further progress this past eighteen months
we cannot find the second part of this at all objectiona- and has therefore underperformed a rampant US market
ble, having longbeen promoting the view that the USD by a quarter (and by a half since the LEH crash itself).
would do what it has repeatedly done (in real effective
rate terms) ever since the break up of the Gold Pool in Nor does fixed income offer much hope for all that the
1968 signalled the imminent end of the Bretton Woods BOJ has managed to push bond futures to new all-time
system namely, decline then base out over the course highs. The EFFA total return index - when measured in
of a decade to a point within +/- 2 1/2% of the same base USD has hit a 4 1/2 year low, wiping out all gains since
level (95.5 on the BIS index), then reverse and rally for the end of 2008. Compared to its UST equivalent it has
the next 6 1/2 years. slipped 26% since last November and 42% since the
middle of 2011. All gains in these trades when hedged
On that scenario, just as late 1978 marked are at root derived from (a) the bond-buying means by
t he inauguration of t he Volcker-Reagan which the yen is being depressed and (b) the translation-
SuperDollar (which topped with the Plaza Accord in al effect of unchanged foreign earnings upon a deprecia-
1985) and just as early 1995 saw the post-Tequila low tion-reduced equity base among the exporters.
and the Sakakibara rally which effectively petered out
under the trifecta of influences exerted by Why, therefore, as a non-Japanese domiciled investor in
the geopolitical upheaval suffered in the wake of 9/11, the Nikkei, you would wish to run even the slenderest of
the first flush of enthusiasm for the newborn euro, and tail risks of the country suffering a systemic melt-down if
the subsequent opening up of China via its WTO acces- it persists in its present course or, conversely, incur
sion so, too, did the second half of 2011 reinstitute the the hazard that a wrenching reversal and a concomi-
US as the default destination for the worlds surplus fi- tant asset price collapse is forced upon the authorities
nancial capital given the cessation of Chinas vast refla- at some not-too distant juncture, all for zero absolute
tion, the dislocation of the Fukushima disaster in Japan, reward and all the while taking a positive pasting in rela-
and the outbreak of the Target2 wars and Draghis tive performance, is a matter you really should discuss
whatever it takes palace coup in Frankfurt. with your shrink!

On that form, the present rally should last until the first
half of 2018 and a higher dollar implies a lower yen,

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True Sinews
December 2014

Courtesy Bloomberg

Courtesy Bloomberg

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True Sinews
December 2014

Swings and Roundabouts mine built in the previously trackless wastes of the virgin
jungle?
For all those still clinging to the hope that
todays extraordinary level of equity valuation will soon So it has traditionally been the case that the extractive
reverse and what we fondly remember as normality will industries routinely fall prey about every generation or
again break out (and we confess that we are often to be so to a tremendously extended hog cycle, or perhaps to
found among their camp), we and they should never lose a Lotka-Volterra predator-prey dynamic of near great
sight of the fact that this exaggeration is a direct result of extinction magnitude.
the central banks deliberate move to destroy the market Working from the other direction, periods of enhanced
for time discount and so to provide the rentier class with resource scarcity caused by war or deliberate supply wi-
a little assisted suicide (only fair since it was obviously thholding (e.g., the two oil shocks), or of the kind of ele-
all thesavers fault that the previous period of central vated resource pricing which has come about through
bank laxity had induced far too many people to borrow monetary disruption (and the two can often go merrily
too much bank credit the last time around with predicta- hand in hand) have often been those most unpropitious
bly disastrous results). for stock prices, not least because the heightened uncer-
Alas, the corollary to this select form of inflation (a tainties involved in pricing, budgeting, and accoun-
much abused term about which we shall have a good ting typically crush multiples even if nominal earnings
deal to say in these pages) does not necessarily apply do keep pace with what are (in the latter case) typically
or at least does not apply in quite such a regular manner swollen nominal revenues.
to those so-called real assets among which investors Thus the ratio of the prices of equities and those of com-
may also seek some respite from the grinding impove- modities has chased itself up and down some pretty ver-
rishment of below-zero real interest rates. This disparity tiginous hills and valleys, laid out along a consistently
occurs for the simple, but oft overlooked reason that the rising trend, as can be seen from a graph of the relation
very same processes which first elevate the price of such between them over the past hundred years or so.
assets also both stimulate and facilitate the laying down
of the means with which to produce more of them and so Equities were at their weakest (and commodities their
alleviate the scarcity. No cure for high prices like high strongest) at the end of the Great War, only to move
prices, as the old adage goes. sharply in the other direction in a period bracketed by
the sharp, purgative deflation of 1920-21 and the Wall
Though this latter evolution takes time to bring to frui- St. Crash of 1929. Falling in a wavelike manner through
tion, that it does indeed come about should come as no the Depression and the Second World War, the ratio
surprise to devotees of Austrian Business Cycle Theory. bottomed out in the 1949 inflationary slump before
In its barest essentials, the one thing this thesis insists again climbing onward through the Go-Go 50s and 60s
upon is that a market rate of interest which is too long to a peak which coincided with the first inkling of the
depressed below the (admittedly unobservable) natural coming breakdown of the Bretton Woods system.
rate (the one which reflects actual societal time prefe-
rence in deciding whether to have jam today or jam to- The Great Inflation which followed as currencies floated
morrow) will lead to an unwarranted degree of capital and still-dirigiste governments attempted to ride the
lengthening. This build-out is usually all the more en- fiction of the Phillips curve took stocks to another nadir
hanced the more protracted (the more roundabout in and commodities to a steepling zenith at the end of
the original parlance) are the associated cash flows, the the 1970s when a certain Mr Volcker backed up by
higher therefore their duration or put another way Chancellor Howe in the UK helped rewrite the rule-
the longer they take to amortize and the project to deli- book for all.
ver its anticipated returns. Long bonds, as any yield Another two decades of equity glory and commodity dis-
jockey will tell you, rally more than short for any given may were to follow, culminating in the oil price slump of
rate change: long industrial chains do exactly the same. 1998 and the soaring Tech bubble peak of 2000.
Given this, the aggravated effects on resource industries Cue another reversal to the $150/bbl heights of summer
should be easy to imagine. What, after all, could be more 2008, since when the balance has gradually shifted once
roundabout or more capital-intensive than a deepwater more with equities pushing every upward (albeit for the
offshore oil rig, a floating LNG platform, or a new copper deplorable reasons discussed at the head of this article)

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True Sinews
December 2014

while the arrival of much of that long-awaited extra

supply of raw materials, at a time when the unresolved
overhang of the last Boom is still throttling the entrepre-
neurial impulse across far too extensive a swathe of the
globe, has caused a melt-down in one after another of
the financial markets erstwhile new playthings, from
cotton and rubber, via gold and silver, to iron ore and
oil.
Loosely then, equities bottomed against commodities in
1920, 1950, 1980, and again in 2010. Though not quite
so regularly spaced between the wars, the succeeding
two relative peaks occurred close to 1970 and again, thir-
ty years or so on, in 2000.
Roughly 10 years of real asset bragging rights with a
fall in the stock/commodity ratio of between 75-82% on
each of four occasions have thus been interspersed
with 20 years of equity triumph a counterpoint what
has, each time, set a higher high at its culmination.
If the pattern is to be repeated in full this time around, it
could be another 15 years and a whole desert of re-
source investing despair before the tide turns once more.
Did someone at the back say, supercycle?

Authors calculations

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True Sinews
December 2014

Once upon a Time in the Oil Market opinion makers) can recommend as a palliative no more
than one determined push after another to inflate asset
One of the overarching characteristics of asset markets is prices ever higher and to force bond yields ever lower
that its participants are prone to harbour the eternal while sanctimoniously deploring the Cantillon effect-
Doublethink whereby the consensus usually revolves exacerbated degree of inequality this permabubble ap-
around a sempiternal bullishness with regard to equity proach cannot fail to deliver.
prices and an equally unshakable millenarian gloom re-
garding the wider prospects for the human race. In the particular case of the oil market, the ironies are
especially rich. Barely six months ago, front-month WTI
With regard to the latter, it should be recalled that, only was tantalizingly close to staging a breakout from the
a few short years ago, the media were overly solicitous of long, narrowing, sideways range it had mapped out since
the morbid declamations of both Hubberts Peak Mal- first being jolted higher in the wake of the Arab Spring
thusians and their lesser brethren who saw naught in and, more importantly of the reduction of Libya to a
prospect but depleted mineral seams and planetary- Hobbesian failed-state wasteland. As prices rose, so too
scale dustbowls. All of this ilk were much given to tortu- volatility declined to less than half of its post-LEH
red Old Testament visions of an imminent, resource- norms and speculative long positioning grew ever hea-
exhausted Dystopia were we not instantly to repent of vier combining to offer a compelling picture of com-
our unrighteousness and sin and to follow their always placency and herding.
anti-economic and frequently anti-scientific prescrip-
tions for society instead. Participants were further desensitized to risk by dint of
being paid to run these positions thanks to the constella-
These croaking birds of ill-omen perched oh-so comfor- tion of a drumbeat of near-term supply disruptions and
tably alongside all the other rag-tag avians of despair the hedging pressure being exerted at the far end by
the anti-capitalists, the eco-catastrophists, and the Americas surperforming shale drillers meant that the
would-be Guardians of a global Gulag to warn us that curve of price against time sloped steeply downward at a
we (though rarely they) should become persuaded negative gradient of around 15% a degree of difference
and, if not, then mercilessly compelled to give up our not seen in a decade. This condition one commodities
dreams of a first home, a second car, a third child, a traders call backwardation meant that the buyer of a
fourth holiday, and in general all aspiration to a less ma- futures contract could expect it to move ever upward in
terially constrained existence. Rather, they railed, we value as its expiry approached.
should volunteer en masse to enlist in their compost-
toilet Collective where we, the last residuum of humanity In all, at the late June peak, more than a quarter of all
graciously allowed to survive their multi-billion being open interest on Nymex was attributable to speculative
cull, would selflessly toil to scratch a communal living (a holders who had by then amassed command over 880
morally superior organic, if alas an agronomically deri- million barrels in WTI and Brent roughly ten days
sory one, naturally) in our own, zero-impact, carbon- global consumption for a notional value of getting on
neutral, low food miles back yard. for $100 billion dollars in heady Groupthink. Fund ma-
nagers to whom we spoke at the time, whether in the
Fast forward through six or seven years of switchbacked smallest family office or at the largest pension fund,
commodity markets and stubbornly elusive recovery were all eager to show off their new-found familiarity
and the prognosis has flipped through almost 180 even with the goings-on in the Permian or the Barnett shale
as the prevailing level of pessimism has remained locked and proud to volunteer their benchmark beating expo-
at the maximum 5 on the Saffir-Simpson scale of depres- sure to the E&P firms engaged therein.
sion.
Though Nemesis followed unusually hard on the heels of
For if the prophets of doom in 2007 were warning of this mass outbreak of Hubris, we are still some way from
Peak Oil and population pressure, now the theme has expunging all those bulls in the manner that we briefly
become Peak People and petroleum plethora. Secular once did at the height of the 2008 panic. True, WTI
stagnation and demographic deflation have become the longs have been cut by some 45% but they still remain at
new buzzword ailments. For these, you may not be enti- 270 Mbbl and at 18% of all O/I; Brent positions have
rely shocked to learn, the Clerisy (to borrow Deirdre shrunk rather less by around a quarter to sit at 300
McCloskeys contemptuous denomination of our elite Mbbl or so. Notional holdings have therefore plumme-

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True Sinews
December 2014
ted by no less than $58 billion, but still remain at
something over $35 billion as of the time of writing.
Worse, volatility has undergone a rapid mean reversion,
meaning the cost of buying protection so universally
despised amid the easy gains of late summer has
climbed drastically as it always does in a sell-off. Moreo-
ver, rather than earning money for sitting idly by as con-
tracts successively rolled up off the board, the curve has
whipsawed into a steeply positive 10% slope where the
roll down now entails a 4 1/2 year high exaction of carry
cost with front contracts having fallen 35-40% and
longer term ones off a more modest 15% from what were
previously lower absolute levels.
As for the profound alteration this has caused to that
collective unconscious we tend to personalize as The
Market, we must digress a little to explain what we
think is the great import of this shift.
Most people outside the circus of the financial markets
(and all too many from within the narrow ring of saw-
dust in which it takes place) fondly imagine that the bu-
siness of producing analysis and of delivering an
exegesis of the madcap daily swirl of red and green tick-
ers is in some way related to science. Disinterested
researchers gather all the data, diligently apply the tools
and techniques they have learned to tease out their un-
derlying patterns, then formulate an objective diagnosis
from which will swiftly issue an all but indisputable pro-
gnosis. So we would like to kid ourselves it happens.
But think again, dear reader. We market actors do love
our creation myths to be confirmed by the recent price
action so that we can all nod sagely at each other when
we recycle the tale in our written commentaries and du-
ring our two-minute TV talking head slots. This means
that our sacred texts get rewritten every few months in
order to reshape the facts as they arrive so that they givethe 19th century we have been aware that we can expect
a semi-coherent voice to our emergent re-
interpretations. This becomes all the more compelling
when the market trajectory has gone decidedly counter
to our previous orthodoxy and when the resulting mass
embarrassment must quickly give way to the shameless
amnesia of an outright paradigm shift.
The fewer dissenters there exist who did not buy into
that earlier consensus and have therefore annoyingly
earned the right to chant I told you so as the sheep are
now shorn, the greater the ease with which any half-way
convincing piece of post hocreasoning of the opposite
investment case to that now being demolished will tend
to be adopted by a sell-side crowd whose members will
Please refer to the risk and legal disclaimer at the end
of the document.
then pretend above all to themselves that they were
the ones telling us so all along.
This means that, in the face of a perverse market trend,
what is never to be underestimated is the flimsiness of
any conclusion reached by means of what we like to flat-
ter ourselves are the fundamentals. In fact, if the con-
trariness long persists as it clearly has with regard to
the development of todays oil prices one should al-
ways expect the fundamentals themselves to be neatly
massaged to reflect the new reality. Rationalizers tend to
rule the roost, not rationalists.
Thus, from jointly imagining oil was about to launch
higher, the late summer relapse first produced reams of
warnings that while it might dip further it could not long
trade below $100, or $90, or at worst $80, for either the
state producers budgets would implode or the private
sector drillers and explorers would have their credit
lines slashed. That way, any temporary surfeit would
quickly be turned to dearth by suspensions of produc-
tion, whether via cartel agreement or force majeure.
In his prior incarnation, just ahead of the cartels now
notorious November meeting, your author publicly ex-
pressed his doubts both about OPECs motivation and
about the means by which it might ensure everyone
would pump less had it indeed desired them to do so. He
has also frequently taken issue with much of the asso-
ciated cost-of-production reasoning a line inevitably
trotted out at moments like these as being little remo-
ved from Marxs and Ricardos long discredited labour
value theorem.
In contrast, we must not lose sight of the incontrover-
tible truth that things sell for what the most urgent
buyer offers to pay for them, not what they cost their
maker to create. What is more, since the latter part of
goods on a rising cost curve to be produced right up to
the point where the last quantum sold will just cover the
outlays made in fashioning it and getting it into the pur-
chasers hands. This implies that any and every lessening
of the latters appetite as reflected in his bid price will
entail either a short-term entrepreneurial loss (hopefully
one to be offset with new innovations somewhere in the
business) or a reduction in supply or both. Thus it
should be no surprise that when the price of crude falls
or the price of copper, cotton, comic books, or cocktail
sticks someone, somewhere will be at least temporari-
ly discommoded and may even be driven from the mar-
ketplace altogether.
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True Sinews
December 2014

The problem therefore for those trying to call a bottom The point is not to wonder whether the boasts made by
in crude prices is twofold: out in the real, dirty world of the likes of Exxon that it can deal with $40/bbl indefini-
pricking Mother Earth deep in her bowels, then trans- tely bear up to scrutiny, or to try to decide how much
shipping and cooking the associated goo to order, all too weight if any to attach to names such as Fadal Gheit at
many of the major players suddenly seem be playing a Oppenheimer talking about a sub-$30 half-cycle level
reverse mens bathroom game of boasting how small is or to Ed Morse at Citi playing up a $5.50 well-
theirs (their break-even price, that is) and, secondly, we completion cost, but simply to note that the market dia-
financial market screen-jockeys have started to invent lectic is now clearly being structured around questions
new reasons why our previous floor prices were hope- of how low and for how long in a radical reversal of its
lessly wrong and hence why oil can fall much further yet. previous rhetoric.
Some of these arguments turn upon how the possibility That in itself tells us that, absent some fairly dramatic
of enforcing some sort of discipline within OPEC has new developments in the real world with which to di-
been fatally compromised not just by extra-economic srupt this novel calculus, the line of least resistance still
considerations such as East v West and Sunni v Shia, but points clearly downwards.
by the tripolar nature of the new order wherein Saudi
Arabia, Russia, and the US are all roughly equal in scale
and each holds very different views about the merits of
co-operation and competition from its peers
Beyond that, there is genuine disagreement over just
how quickly a lower price will act to dry up supply from
the game-changing shale oil formations of the US. It
should be noted that the best guesses at present still deal
with second derivatives of increase and not with outright
contraction. While some contend that a form of high-
grading will occur with the more prolific, lowest-cost
fields receiving the lions share of new investment and so
keeping the pipelines filled others point to the way the
so-far uninterrupted march of technical prowess has
inexorably lowered and presumably will continue to
lower the cut-off point, just as it has ever since the re-
volution began a short half-decade ago.
Others adduce the fact that many calculations of the
pain threshold wrongly incorporate the sunk costs of
acquiring leases, building infrastructure, and underta-
king the initial drilling whereas all that matters looking
forward is what it costs to complete unfinished wells and
to lift hydrocarbons from across the whole portfolio.
Furthermore, there are those who argue that the in-
dustrys high debt load will force many to sell whatever
they can get out of the ground at whatever price it will
bring in order to try to service that debt and so hang on
to the underlying assets for as long as possible. Yet
others foresee a shake-out which certainly will wipe out
existing note-holders and equity investors but which will
thereby deliver the associated physical capital on a lo-
wer, post-bankruptcy cost base to those with deeper
pockets and potentially better management skills with
which to exploit it.

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True Sinews
December 2014

Courtesy Bloomberg

Courtesy Bloomberg

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True Sinews
December 2014

East of Eden with the ECB often, of course, this ends up enabling a kind of interper-
sonal deficit without tears to develop as the CBs inac-
In the sweat of thy face shalt thou eat bread, till thou tion essentially lessens the budget constraints which
return unto the ground; for out of it wast thou taken: would otherwise be imposed by the need for increased
for dust thou art, and unto dust shalt thou return. outlays on those items, like food and fuel, whose con-
Or so a rather angry Jehovah was said to have thundered sumption can only be partially foregone and for which
at Adam when he cast him out of the Garden for com- immediate substitutes are hard to find.
mitting the cardinal sin of developing self-awareness. Absent such a move, those on a fixed income (other than
Ever since, the story goes, mortal mans lot has been a the oil and food providers themselves) would perforce
sorry one of incessant toil, the inevitability of his demise have less to spend on all other offerings. Assuming that
and for his beloved partner the anguish and deadly the bracketed grouping do not immediately parlay their
peril of childbirth. windfall into an exactly offsetting (and, strictly, an
So, if we could persuade a forgiving God finally to relent exactly corresponding) expansion of demand, this would
and to repeal our sentence, giving us safe passage back tend to exert a downward pressure on all other prices. In
out of the Land of Nod to the primaeval, care-free para- this way, the shift would do its job of signalling to entre-
dise of our creation, do you think His mercy would be preneurs, investors, and those seeking work that the de-
well-received by those who presume to rule over us here clining sectors should no longer command so much of
and now in the earthly realm? their time and effort, but that they could more profitably
and usefully divert their endeavours towards meeting
Not a bit of it! Theyd all start moaning about the
the increased scarcity being felt elsewhere and so resto-
deflationary consequences of the alleviation of our suf-
ring a new balance to the system.
fering and instantly start threatening to perpetrate yet
more violence upon our property and our preferences by Instead, what this business of only responding to core
forcing upon us an even greater swathe of their costless, indices of price tends to provoke in the upswing is a
irredeemable, legally non-refusable liabilities in ex- more expansiveprovision of money aimed at forestalling
change for any and every financial title arising from our any such decline but also serving to frustrate the requi-
private, voluntary contracts and even to our very physi- red adjustments in the real economy. Simultaneously,
cal goods, either by directly stockpiling them or through this will heighten the risk of igniting a blaze of ever
financing their sequestration via government deficits. higher prices for all things, once that extra money flows,
as it must, into the very sectors left out of the policy
Do you think this sounds extreme? But what else are we
makers calculation, the need for which is still perceived
to make of the rumblings emanating from the Bank of
as more urgent than for the others, just as it would have
Japan that the fall in crude oil prices is a curse upon the
been had the Bank failed to act.
archipelagos citizens, rather than being an unbounded
benefit to everyone not too heavily invested in the expec- Conversely, if the price of crude falls, this should natu-
tation that they can only remain more elevated in real rally allow more money to be spent (other than by the
terms than at any time in modern history (i.e., that they now disappointed energy providers) on whatever else is
cost more sweat of thy face per barrel than ever before). on offer in the shops. Additionally, it may lead to the
creation of an investible surplus with which to expand
What do we make of the ramblings of the ECBs chief
the range of possibilities for tomorrow and so, inciden-
economist, Peter Praet, when he argues that the long-
tally, to help replace the capital being lost in the energy
held tenet of central bankers that one-off changes in the
industry with a new endowment devoted to bringing
price of certain components in their favoured basket of
other things to market in its place.
goods and service most notably food and energy
should be overlooked when making policy as not being What is not needed is for the monetary authorities to act
amenable to short-term monetary manipulation? to offset the fall in energy simply because they are in
thrall to the prevailing fiction that they are in the busi-
Of course, this argument is all too convenient when such
ness of expectations management with regard to what
goods are becoming more expensive, since it provides a
they call inflation. Under this perverse imagining, what
ready excuse for the Bank to procrastinate in facing up
our overlords seem to envisage is that if people find they
to the unpleasant (and usually politically contentious)
have more left in their wallets when they next fill up the
task of reining in its levels of accommodation. All too

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True Sinews
December 2014

family car, they will not rejoice at being better off but horse acquisitions and foregone casino jaunts in their
will instantly indulge in a fearful hoarding of their cash five star misery in Dubai, or Moscow, or Houston. If not,
amid the suspension of all enjoyment of lifes pleasu- you should be aware, Mr. Praet seems to be admonis-
rable non-essentials, and that, as this paralysis takes hing us, that economic activity in Europe will contract
hold, they may even sit starving outside the groaning further since this is predicated solely upon the dominant
display window of the bakers shop, simply because a economic shamanism of well-anchored inflation expec-
CPI index of which they have probably never heard and tations and also watch out for the regions towering
which, in all likelihood, has very little relevance to their debts to appear even more unserviceable than they are
individual mix of preferences and possibilities in any today, into the bargain!
case is doomed to show a nought-point-something de-
Have we really reached such a stage where decisions re-
crease when next it is published.
lating to trillions of dollars and euros of centralised, in-
Praet may of course simply be indulging in a degree of discriminate, and utterly inequitable asset buying hinge
special pleading. He knows his boss is envious of the upon such an insubstantial construct as this chimera
power wielded by a Bernanke or a Kuroda and that his of expectations? It seems, alas, we have.
dreams of glory are being frustrated by those annoying
Truly, we have nothing to fear but the fear of
northern European curmudgeons who would prefer it if
fear itself!
he stuck both to the literal charter of their institution as
well as to its more intangible, though no less weighty, Mind you, if might not hurt to take this expectations/
traditions. If that is the case we could overlook the poor animal spirits lark a bit more seriously in the context of
logic of his recent appeal, though only at the cost of what European policy says to the entrepreneur about
questioning his intellectual integrity in its place. what his chances are of both successfully launching a
new, or expanding an existing, venture and of how likely
As the man himself put it: well-anchored inflation
it is that he will actually get to enjoy some of the fruits of
expectations are indispensable for medium-term price
his success without suffering either arbitrary confisca-
stability. They provide a nominal anchor for the econo-
tion or enduring populist outrage should he manage to
my [just how exactly?]. And even more so in the current
achieve it. We shall return to deal with this matter in a
environment: given the potency of the current oil price
forthcoming article.
shock, the risk is that inflation may temporarily fall
into negative territory in coming months Normally,
any central bank would prefer to look through a posi-
tive supply shock But we may not have that luxury at
present. The reason is that shocks can change: in cer-
tain circumstances supply shocks can morph into de-
mand shocks via second-round effects [again, how, pray
tell us?]. In these conditions monetary policy needs to
react to what initially appeared to be a supply shock, so
as to prevent a destabilisation of inflation expectations.
Stripped of its jargon, what he is saying is that the lower
oil prices go, the more he wants the price of all other
goods in the shops to go up: that he wishes to pass a law
insisting that you when you stand before the girl on the
supermarket till to pay for your groceries, you have to
fork over the tenner you thought you had just saved out
on the stores garage forecourt.
Better yet, why not reverse-subsidize the price of oil: let
us keep its price fixed and remit the difference between
what Mme Renoir or Herr Pfister will continue to pay at
the pump and the actual lowered market level straight to
those poor, anxious souls fretting over their lost race-

11
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December 2014

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Last updated December 10th, 2014

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