Understanding the Talking Heads
November 11, 2009
Talking heads abound in the markets. There are corporate CEOs and other high-level officers. There are central bank members. There are treasury and ministry of finance officials. There are heads of state. There are prominent money managers, economists, and other professionals. Opinions and philsophy and ideas come at us constantly. Personally, I mostly ignore those offering opinion. Generally speaking, those folks aren’t the type of decision-makers who will actually drive prices.
The government and central banks speakers, however, are a different story. As I noted to someone in an exchange a short while ago, they may not generally be price makers, but they are definitely price influencers. And I’m not just talking about what they say. What they do is even more important. That’s what I want to speak to here.
I’m going to pick on the US Treasury Secretary – not specifically the current one, but pretty much the whole string of them. How many times have you heard some version of “we want a strong dollar” coming out of that office? It’s like a mantra, isn’t it. They say it all the time. They might even actually believe it most of the time.
Here’s the thing, though, things have priorities. The goverment might actually want the currency to be strong, but that may or may not be high on the priority list. In fact, most of the time there are things the politicians rate more important. That’s why you get the dollar falling when the Treasury Secretary making strong dollar comments.
It all comes down to what they are actually doing. Things like running big government deficits is generally something that will weigh on a currency. Relatively low interest rates will tend to do the same. Changes is taxes or regulation or trade policy can also impact the relative attractiveness of one currency against others.
I think we all know intuitively that more attention should be paid to actions than words, but sometimes that can get forgotten in the heat of the moment when the market is reacting (or not reacting) to news. If there seems to be a disconnect between what some talking head is saying and what’s being done, always go with the latter.
Then too there’s the fun times when there are conflicting comments. That has been the case with the UK in second half of this year. Members of the Bank of England made some pretty clear comments over the summer about the attractiveness of a lower pound. They were in the middle of their quantitative easing program, which was a natural drag on the currency’s value. A couple of months ago, though, several voices from within the government tried to counter “weak sterling” comments saying the BoE really wasn’t looking to weaken the currency. At no point, however, did anyone from the central bank actually say that. As a result, and lift sterling got from the “positive” government comments was quickly erased.
All of this falls under the category of good fundamental analysis. It’s not just looking at numbers. It’s also about understanding what the policy makers are doing, or intending to do, as they are big influencers on trends.
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“Watch what I do, not what I say”, very true.
A couple of questions:
1. “Things like running big government deficits is generally something that will weigh on a currency”. Early in this decade, the US turned a significant budget surplus into a large deficit. From then on, the deficit kept on growing. Coincidentally, the US Dollar has been suffering a long term depreciation since then. In macro terms, trying to single out the major factor behind the currency’s fall, is the deficit the most significant? Or would you choose a different one?
2. “There are prominent money managers, economists, and other professionals”, and then this: “The government and central banks speakers, however, are a different story”. Are you dismissing the professionals then? How about respected ones like Paul Tudor Jones saying he is buying gold? Given that his statement was part of his letter to the hedge fund’s customers, he is talking and doing. Recently several other pros have joined the gold party. Do their combined words and actions have significant or only minor influence?
Rod – To your points:
1) I think most economist types would call the dual budget and current account deficits the major causes for sustained dollar weakness. Technically speaking, the budget gap is closed by Treasury borrowing. That sops up the extra dollars from the system (put there by gov’t spending), but puts other pressures on the currency. In the final analysis it’s always the net demand for dollars vis-a-vis other currencies which is the main factor, and that plays out in trade and capital flows, which are current account items.
2) Yes, I’m mainly dismissing the pros. Prominent investors and money managers like Tudor Jones, Sores, Rogers, etc. tend to have relatively transitory impact on prices. The markets may react to their comments, of course, but even they aren’t big enough to move markets for very long if the flows and sovereign interests are going the other way.