The “dog days of summer” seem to have arrived: I did not find very much in today’s newsflow to be stimulative of thought. Perhaps Mark Carney’s presentation today will provide some mental fuel.

Mr. Rohani has suggested talks with the US, but has not signalled any willingness on the part of the regime to halt uranium enrichment. An analyst says that the Iranians probably will not compromise on having a domestic enrichment capacity.

That makes sense to me. Seen from the Iranian perspective, the US is clearly inclined to start wars in order to further its own interests in other parts of the world (the fact that the interests on which the use of force is based may be either real or merely perceived, as in the case of Iraq, would make any reasonable actor more inclined to think about its own defence). The Iranian regime is clearly worried. Against the conventional might of the US, only deployable nuclear weapons will be a reasonable deterrent, and so the regime is trying to acquire them, or to acquire the capacity to build them in a relatively short period of time.

I cannot see that very much can happen to change this calculus. Sanctions, by demonstrating the hostile will of the US, only reinforce it. Unless they promote a revolution in Iran, which is possible but unlikely, there is little reason to expect that the basic structure of the situation will be changed by anything short of military intervention. Such an intervention would be difficult and dangerous for the US: it would have to be large-scale in nature, and could turn out to be an even bigger quagmire than Iraq. For that reason, the US is likely to shy away from it. Therefore, it is likely that Iran will have nuclear capability in the relatively near future.

USD/JPY appears to be dropping again, as is NKY. I shorted US equities at the start of June because that was happening; perhaps I should be doing the same again.

I wonder whether my hopes for the June trade — which I executed badly, expecting a larger drop than the one that actually occurred — were too high. After all, the US economy is clearly improving, US companies are clearly profitable, profits are growing, and against a backdrop like that, equities should have a continuous gentle rise like that of the mid-2000s. Indeed, I made exactly this argument at the start of 2012, on the proviso that there was no further catastrophe in Greece. In the event, there was at least a ruction in Greece, and US equities pulled back, but once that was put to bed by the second Greek election, equities started rising again. This might be a better explanation of the behaviour of the equity market over the past eighteen months than either Draghi’s OMT announcement or the Fed’s latest round of QE. The former was endogenous to my rough model of the situation — I was arguing, effectively, that the ECB would do whatever it took to hold the euro together even before the first LTRO announcement — and I am not sure that the latter has had much effect. In summary, the explanation would be: “Why have equities gone up? Because they usually do when profits are growing.”

Anyway, none of that argues against the possibility of another short-term pullback. I do think that the rally in US and European equities has gone too far for the profit growth we have seen — which is to say, I have a model of how the S&P 500 behaves, based on a combination of company profits and economy-wide credit spreads, and the model suggests that the S&P 500 has gone too far.


  • Non-farm payrolls 162k d.e. and fell, Jul.
  • Unemployment rate 7.4% b.e. and fell, Jul.
  • Labour force participation 63.4%.
  • Employment/population 58.7%.
  • Personal income 0.4% d.e. Jun.
  • Personal spending 0.5% a.e. Jun.
  • PCE on durable good 0.9% Jun. This has been a reasonable leading indicator for the economy over the long term, and continues its upward trend.
  • China non-manufacturing PMI 54.1, rose slightly.
  • UK services PMI rocketed to 60.2, b.e. This is the highest reading since December 2006.
  • ISM non-manufacturing rose sharply to 56, b.e.
  • Italian preliminary GDP -0.2% qoq b.e. Q2.
  • Trade deficit narrowed sharply, b.e., Jun. Exports rose and imports fell.