Authored by Richard Breslow via Bloomberg,
It may be hard to believe after watching Monday’s market dramatics, but there is good news as well as bad. You just have to decide what dip location offers advantageous risk reward in a downdraft episode. And those levels are all over the place.
The danger is that there are also mounting opportunities for policy mistakes in how we respond, and don’t respond, to what is going on. It would be pure folly to be blase about the risks. If asset prices can reflect emotions and animal spirits as much as economics, the headlong dash by the world’s central banks to prove they can each out-dove the next one may be a strategy that is well past its sell-by date.
And, selling is precisely the way to think and worry about it. Forward guidance worked great in the aftermath of the financial crisis. Lower for longer was very much the intended message they needed people to internalize. Debates about normalizing policy anytime soon were meant to be understood as academic exercises. With little practical effect any time in the foreseeable future. And investors acted as they were expected to. But they were important discussions, nevertheless.
They gave people hope that there was an end-game here. Once they no longer believe that to be the case it becomes almost impossible to maintain the notion that the world can afford to have monetary policy as the sole support for the global economy.
It’s a reality that everyone seems to realize except the people responsible for fiscal policy and legislation.
They seem to think they can just let the help clean up the mess.
Three things remain very real perils.
People listen to the central bank messaging, become scared, and don’t spend. But they do vote. There is a legitimate reason that so many big-ticket items are going unsold. And that won’t change by going back to the zero bound. Forget the nonsense that negative rates will cause anyone to run out and buy something to get rid of what savings they have left. I’m convinced you have to have tenure to actually believe that.
And then you have the uncomfortable coexistence of businesses hesitant to make capital commitments with investors forced to keep leveraging up and buying more. Sometimes through sheer lack of better ideas involving products they don’t know sufficiently well. That’s how you get the kind of panic that we saw yesterday.
Add that to increasing government debt burdens and you eventually become permanently stuck because the pain of the unwind is just too great for the politicians to contemplate. It may well be the case that a quiet period of lower growth is what is really needed. A time cure. But, at this point that is an argument most of the world doesn’t want to hear. And it would take a brave policy maker to suggest it.
Incidentally, some well chosen and market soothing words out of Argentina and you will start to read arguments that short-dated paper is looking pretty tasty. Someone will take a stab at accumulating some two-year paper. And off we’ll go again. It’s tempting to say traders never learn. But that’s the point. They aren’t meant to.
Keep an eye on the MSCI Emerging Market Index as it approaches its support zone that begins just below 950. It’s also where we took off from at the beginning of this year.