Volatility, loss of confidence and central bank impotence stalk the capital markets. Gold pulls back in an expected retrenchment. Equity markets are still digesting what the world looks like: absence of a strong Chinese domestic economy, developing economies losing their easy credit, oil prices adjusting to demand levels indicative of economic activity and, most tragically, the continuing proxy wars fought in the middle east as warmongers continue to slaughter innocent civilians.
Monetarily speaking the markets are just not playing to the script. It must be infuriating for the unelected officials at our all-powerful central banks to have to take steps to remind or tell, nay, instruct the markets what is correct and what is not. By enforcing interest rates on the market, the Fed, and by extension every other central bank, has denied the market its internal risk rebalancing mechanism. They have manhandled the markets into short term submission, created unintended bubbles which inconveniently burst and exposed the sheer madness and short-sightedness of the modern Keynesian-based monetary model.
When the markets do not buy the message, central banks summon their proxies to bid up or smack down the markets for debt, equities and commodities. They write the script, provide insiders sight of their plans and coordinate market manipulation to give the script meaning and the impression of their competence and foresight.
In my view these bad actors are not necessarily evil people in the sense that they wish to harm you or I — no, they are far more dangerous than that. They are well-intentioned economic zealots, entrusted with enormous power and an impossible mandate: to deliver stability and growth steadily now and forevermore. This is where the true absurdity at the heart of the matter lies. Economies and markets are naturally cyclical. Blow-offs followed by busts are as sure as day follows night. This cycle is critical as it allows for trial and error, the creation of anti-fragile networks and system resilience — it is the very reason mankind got this far. Unfortunately, it cannot be modelled in a spreadsheet and thus cannot fit in a box. The markets need space to breathe, contract and grow.
Officialdom has sought to smother this natural process and now they will pay a terrible price — the loss of confidence in the monetary system. This will lead to even more desperate measures as governments turn on each other and competitively devalue their currencies in a vain attempt to placate national interests. Sheer madness.
In a superb analysis of the recent market malaise Citi’s Credit Analyst Matt King stated eloquently:
“Far from making the world safer, then, there is a risk that the post-crisis policy mix has simply suppressed problems, making markets stickier, and may even have added to them, by driving the global credit cycle far ahead of the current interest rate cycle. Recent market dislocations are a sign that that stickiness may be reaching breaking point. In the past, aggressive easing of monetary policy provided the solution to almost all recent crises – both those which did not lead to recessions, such as 1998 and 2011, and those which did, such as the tech bubble of 2000 and the real estate bubble of 2007-8. At this point we may start to question whether it can provide a similar solution this time round, not just because of the zero lower bound, but because the entire premise on which it has been based – inducing credit expansion and risk-taking in some other part of the global economy – seems to be reaching its limits.
In the property market, agents like to say that location is everything. When it comes to fixing current problems we are tempted to resort to the apocryphal story of the response given to tourists in Ireland when asking the way to Dublin: “If I were you, I wouldn’t start from here.””
In my view the most misguided central bank is the Federal Reserve. They have set the tone of this coming collapse since the 1990s when micro rate management came into vogue under Greenspan. Since then bubbles have been pushed from one place to another and re-inflated time and time again. They have treated the market with a degree of contempt that fails to recognise the human cost of their actions.
The Bank of Japan is in a world of its own. They have systematically eroded their monetary system to a degree no one could have imagined — they are now cancelling bond auctions for lack of interest. They have vastly expanded their monetary base in a futile effort to manufacture a fiscal reality that only Mugabe could aspire too.
By far the title for the most malevolent and anti-democratic institution of them all must be reserved for the ECB. Their policies towards peripheral European countries, in the matter of bond holders and bailouts, has been astonishing. (Review our guide on bail-ins today). They are a transnational organisation with little regard to the social principles that the European Union was established on. They are utterly captive by the economic and industrial interest of central Europe and have been the most divisive entity contributing to the erosion of European integration.
Stephen Flood (Covering for Mark O’Byrne)
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