"The irrational man is only interested in being right. The rational man is interested in learning."
- Karl Popper
by Macro D
Two point-blank questions. Do rational or irrational events surround us? And behind them, sensible or irrational men stand?
Let's open the dance with an event:
Friday, 17 May, was a market session that needed to be remembered. The leading US indices made a loud statement, so much so that they planted the flag on top of a new historic high. Both the S&P 500 and the Nasdaq 100 have had a nice walk on unmarked terrain.
This is not about space exploration but about financial exploration. It's not the same thing, but it's still an activity to be done with your head on your shoulders. But what if the head isn't there?
Of course, given what its brothers and sisters were up to, could the Dow Jones Industrial Index sit there with its head bowed and idle? Not.
So, the 40,000 threshold has been exceeded — more uncharted territory.
Now that we have described the event, let's move on to the people who triggered it: humans.
Isabel Schnabel, a member of the ECB's Governing Council, is evidently a professional who does not hold her breath or her words: when she feels she has to say something, she says it, whether she likes it or not. The banker warned about the hypothetical implementation of several consecutive interest rate cuts in June and July. What did she say?
"Based on current data, a rate cut in July does not appear justified. We should look at the data very carefully because there is a risk of premature easing. We should take a cautious approach and give ourselves enough time to see what is happening."
“Given "high uncertainty" and "with inflation risks still tilted to the upside," it is "too early to say what will happen, and we cannot pre-commit to a particular rate path."
One of the Governing Council's "hawks," Robert Holzmann, warned that the ECB must not stop fighting inflation too soon. What did he say?
"There is a danger that inflation will accelerate again. Regaining control of inflation in that situation would be extremely difficult."
This was the straw that broke the camel's back.
It is not a Chinese vase from the Ming Dynasty but a humble mental shell that invites me to proceed with the Socratic method regardless of the thunder and lightning that strike me from many sides.
But now – I asked myself – do you say that we shouldn't stop fighting inflation too soon, but you are the first to implement an action that shows how you are loosening your grip on inflation?
This phrase by Robert Holzmann reminds me of the words of the football coach who tells his players at the end of the first half in the locker room, which is closed.
"Please remember, now we have to think about defending."
The players nod. In the changing rooms, there is absolute silence, and neither chairs nor water bottles nor flies fly. Then, a minute before returning to the pitch, the coach says again.
"Now, four defenders and four attackers come in."
The players look at each other amazed and think, "But first, didn't he say that we had to think about defending ourselves?"
I try to understand, but I confess my embarrassment. I feel very inadequate. The subject (to be understood) requires a mental process that my attempt to simplify the complexity cannot satisfy.
The context is this: therefore, although uncertainty permeates the global economic/geopolitical fabric, the ECB is the protagonist of a strong move (rate cut in June) in the face of inflation that seems (and we reiterate SEEMS) to want to orient itself towards 2%. At the same time, the ECB, which is preparing to cut rates in June, is making it clear that there will be no follow-up after the June rate cut.
Let's think about it: if a monetary action is carried out (rate cut in June) but at the same time, it is warned that there will be no follow-up to this action, I deduce that this action represents an isolated fact (the classic swallow that does not make spring) and therefore is not part of a precise and linear strategy that tends towards a reorganization of the monetary structure. The ECB makes two things clear with the same fullness of intent: 1) I am about to lower rates, and 2) after I have lowered rates, I have no intention of lowering them again.
Question: But then, why lower rates in June when you already know this action is not an integral part of a strategic plan but a temporary solo?
Yet, I thought, it is called the “European Central Bank”, not the “Peripheral Bank of the Corner”; in that name registered in the registry office of the glorious history of Europe, reference is made to an institution that is central and which is therefore called upon to implement long-term, not short-term choices. A central bank is worthy of the name it bears and is called upon to implement economic strategies that reference the future and well-being of the next generations, not the future and well-being of the next five minutes.
Instead, I seem to be witnessing a central bank that does not behave like a global macro trader (the one who has the broadest overall vision) but rather like a scalper (the one who is necessarily called to have a much narrower vision).
Lowering rates now, and at the same time warning that you will not lower them later, reminds me closely of that sad moment when an addicted receiving a dose of methadone hears:
"Hey boy, let this dose be enough because you won't have any more for a long time, and I can't even tell you until when".
I ask myself: are we all waiting to enter this public facility? But if the economic system is sick, wouldn't it be better to go into the operating room and treat the patient?
Go on. We're not here for the answers. We're here for the questions.
Let’s explore on those thoughts further and look at what chart alerts have been triggered since the last refresh.
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