Central Banks, Milan, Tuscany

It is a fascinating time to discuss key aspects of the global economy that are rapidly changing. In Japan, a hugely stimulative new policy is influencing the foreign-exchange markets and the Japanese stock market. Early indications are that business conditions in Japan are improving. The big debate about the Japanese stock market is whether it will top out soon because it currently reflects the pattern of the last 20 years of lower lows and lower highs, or whether it will break above levels not seen for many years because of the regime change.

We are in the latter camp. We think the Japanese stock market has huge upside potential, while the currency will continue to weaken strategically over the next several years. It would not surprise us to see the yen/dollar rate reach 125 and the Japanese stock market to move much higher.

In Europe there is minor improvement taking place as austerity gives way to some monetarily stimulated resumption of more normal activity. Austerity has run its extreme course, and most populations in most European countries have had enough. We are starting to see a rebound in European stock markets.

A good example is Italy, where the market is recovering and the prospect of possible reforms is creating some optimism in what has otherwise been a very troubled country saddled with very large sovereign debt issues.

In the US, the beat goes on. We continue to see the Federal Reserve (Fed) purchasing $85 billion per month in federally backed securities, divided between mortgage-backed securities and treasuries. We see a debate evolving over whether the figure of $85 billion should be “tweaked” up or down, depending on the data. We also see a discussion inside the Fed about whether to make small changes on a gradual basis if the employment situation in the US improves, or to reverse those small changes if it worsens. Inflation, constantly on the minds of some Federal Open Market Committee (FOMC) members, appears not to be an issue at this time and is not likely to become one for a while.

We anticipate fascinating discussions about worldwide central bank policy and financial markets when we gather in Milan. It is our privilege and honor to be able to participate and comment in response to central bankers’ presentations.

Media coverage of the meeting in Milan is expected to be fairly deep. Manus Cranny of Bloomberg TV in London will moderate our panel and do live interviews from the GIC conference. We expect the remarks of the two Federal Reserve Bank presidents on the program to receive the usual attentive reviews from the financial press.

Global meetings like this one attract public attention because of the exchanges of views. The GIC has functioned as a neutral convener of such dialogue for more than a decade. The GIC is very active these days, given the intensity of developments in central bank policies worldwide.

In anticipation of this meeting, we have been invited to spend an hour on Tuesday, May 14, 2013, at 10:00 a.m. with Stuart Varney on Fox Business. We expect to have some preliminary discussions about central bank policies and markets.

For those who have yet to visit, Milan is an exciting place. It’s a center of fashion and is home to the Duomo, the magnificent Gothic cathedral of Milan; to La Scala, the renowned opera house; and to Leonardo da Vinci’s world famous painting “The Last Supper.”

Having been to Milan several times, attended La Scala, and seen “The Last Supper,” we will take the opportunity on this trip to move on to Tuscany and spend a couple of days in the Tuscan countryside. After the conference, a small group of us will go privately to this lovely area and visit Casali di Bibbiano. Owned by the Guadagnini family, the Casali di Bibbiano is ideally located for its guests to enjoy easy day trips to Siena, Pisa, and Florence. I have gotten to know the Guadagnini family personally over the last few years. They also own the restaurant “Salute!” in Sarasota, and now they have graciously offered their hospitality to us in Tuscany. The reputation they have earned as innkeepers for their food, wine, and guest services is first-rate.

We are looking forward to that visit with friends and to the discussions we will have after the conference. These discussions will likely revolve around policies, economics, and perhaps the savory flavors of Tuscan cooking and a delicious Brunello di Montalcino or two.

A word is appropriate now on food, wine, and this region of Italy. As long-time readers know, this writer is a serious aficionado of French cuisine and wine. References to restaurants in Paris, menus, and certain vintages have been replete over the last two decades in my commentaries. I do not want to suggest any diminution of my affection for French food, wine, and the accompaniments that have made many travels to Paris so pleasant.

To reflect history properly, it is important to note that the origins of French cuisine, elegance, and gracious service can be traced to Italy. In the early 16th century, the ancestors of the present French population were eating a mixture of fish, meat, and vegetables with their fingers from a bowl or a carved piece of wood. A wonderful Italian woman introduced Italian cooking to France. She was Caterina de’ Medici (1519-1589), the great granddaughter of the famous of Lorenzo II de' Medici, who became the wife of the future king of France, Henri d’Orleans. King Henry was the second son of Lorenzo II de' Medici’s great patron, King Francois I.

Back to Caterina. She brought the secrets of Italian cooking from Italy to France. These included Duck a l’Orange, classic onion soup, and artichokes as a culinary ingredient. Fine pastry was also introduced to the French by Caterina. For all intents and purposes, the whole idea of French “haute cuisine” was launched by Italian influence.

According to Michael Gelb, the author of many books on food and wine and a serious researcher of the subject, “Caterina introduced Florentine elegance in the form of gracious table settings, exquisitely embroidered table cloths and napkins, wine glasses and fine silverware.”

We are eager, of course, to sample the fare served by the Guadagnini family at Casali di Bibbiano. A multidimensional experience awaits us in Milan and Tuscany.

First we will address central banking issues around the globe in serious conversations with thoughtful and articulate spokespersons from Asia, Europe, and the US. Then we will head to the hills, pull a cork from a bottle, and taste the delicious juice as we sample some wonderful cuisine. We will then informally continue our economic discussions in a private, relaxing setting.

We return to the US on May 22. At 6:00 a.m. on May 23, 2013, we are scheduled to participate with a master oenophile, Tom Keene, and Sara Eisen and Scarlet Fu on Bloomberg’s Surveillance.

A final note about the GIC: The notion of the GIC is to arrange a forum, to make it pleasant and fun, and to exchange views in a setting where the organization itself does not take a position on any side of an issue. The idea behind the GIC is that if you bring people together and create a collegial atmosphere in which points of view can be exchanged, then people of good will may find common ground upon which to build consensus. GIC has been doing that since 1976 when it was founded.

Never did its creators envision that the GIC would one day confront the central banking issues that presently dominate the world’s financial markets and drive economic outcomes. Never did the GIC anticipate that it would have to view financial markets through the lens of a global situation in which about 85 percent of the capital markets the world over are driven by quantitative easing and the major currencies of the world all trade with short-term interest rates near zero. Never did it visualize that world unemployment would be this high and that world growth rates would bear the burden of such huge expansions of sovereign debt. All of these improbable and challenging developments will be discussed in great detail in public presentations and in private conversations in Milan.

BY David R. Kotok