We’re nearly two months into the new year and one of the defining themes for markets thus far has been the extent to which investors have seemingly woken up to the fact that central bankers are not, in fact, omnipotent.
That rather unpleasant revelation has in turn caused some to reconsider the wisdom of the policies that drove stocks to nosebleed levels off the 2009 lows. That is, if it’s now clear that ZIRP, NIRP, and QE have failed when it comes to stimulating global demand and trade and reinvigorating the inflationary impulse, one is left to wonder what happens when the world careens back into recession against a backdrop of extreme capital misallocation and exhausted counter-cyclical policy maneuverability.
What happens, for instance, if stocks begin to crash and authorities are powerless to arrest the slide because rates have hit the lower bound and there are no more monetizable bonds? Do all DM central banks simply go “full-Kuroda”/ “full-Chinese national team” and provide daily plunge protection? Which brings up another point: the BoJ, the SNB, and Norway’s $830 billion SWF are big holders of equities. What happens when the value of those stakes plunges?
Here to ponder those questions and more is Bloomberg’s Richard Breslow.
* * *
From Richard Breslow
“Moral hazard” has become a hackneyed phrase when warning about asset prices, investor behavior and quantitative easing. In fact, money managers have been merely doing the bidding of policy makers. Doing God’s work and making a buck, too. Now that seems like a plan. The lack of downside risk, which has perverted the normal functioning of markets, has been a vital element of the wealth effect strategy.
- If putting risk back into risk management were the only challenge for policy normalization it would be hard enough. It takes only days or weeks to form a habit: they’ve had us hooked on the juice for seven years. But there is a much more systemic problem our leaders have created. Sovereign wealth funds have taken to plowing the people’s money into those same assets
- How does the calculus change, or not, when considering that Norway is the largest shareholder in Switzerland’s second- biggest bank? The Swiss apparently love Apple and Exxon. The Japanese are itching to get in at these levels
- Should regulators be reclassified as activist investors? Will there be a new concept for tax authorities of “earnings after taxes, dividends and appreciation?” It can be acronymized to TADA. How appropriate
- There is no way to know where this will all lead. These aren’t holdings that run down over time. Too big to fail needs to be reconsidered. Desirability of oil prices up or down for national accounts takes on an interesting ambiguity. Indeed the mere concept of economic gain for a country becomes clouded when it ceases to strictly refer to GDP
- Last week, the world was coming to an end. Today, I have sitting in my inbox messages imploring buy at market, you can’t afford to miss the rally. The market rally has been accompanied with assurances that central banks are back, indeed ready once again to do whatever it takes. So goes the sovereign wealth fund, so goes the nation. WIRP at zero, hurrah
- There has been a simple justification driving the reach for yield. It is for the people. The ethos of central banks as traders is now firmly entrenched. It may appear that it is working, but it isn’t a coincidence that so many languages include the phrase, “it just isn’t done”