Last week offered up yet another example of how a divergence in monetary policy between the Federal Reserve (US) and the ECB (Europe) causes grating swings in financial market activity. Unsure of exactly which policy trumps the other, investors first drove stocks up....based upon "good" economic news... then took away all momentum by selling out just as violently. Finally, once the dust settled, they bid prices up once again!! A trader's schizophrenia has set in with each news announcement. In layman's parlance, "easy money" desired by the European Central Bank would create the liquidity that supports growth and investment; regulating the buoyant state of the US economy, however, probably means a rate increase after seven years of near-zero interest.
Curiously,
there are as many elements to revitalization policies as there are locations
and regions from which to transact them.
Each continent has its advocates who argue forcefully for abiding
principles that make currency stronger, jobs more abundant, and investment
opportunity more sustainable. It is, of
course, impossible to have a "one
size fits all" global monetary
standard.
Yet,
confusion about what the ultimate outcome might be jostles stock markets with uncomfortable
frequency. Here in the US, observers
expect employment to continue expanding, productivity to maintain acceleration,
and output (GDP) to increase. Abroad, the
same pundits see declining output, shrinking employment, and market weakness. Thus, stock markets recoil
daily...hourly...from the confusion.
As
rates rise from their nadir here, and shrink towards their nadir overseas,
investors are faced with the possibility that economic imbalances might
forestall growth in both regions. Major European banks are already proclaiming
that stimulus from ECB capital infusion might take two years or more to gain
traction. China, too, is looking to
support its economy with monetary manipulations because it is forecasted that
their domestic growth might be at its slowest pace in a quarter-century.
I'll
go this way...
And still, even though the trajectory for US
interest rates will soon probably be going higher, deflation pressures are
highest in commodities and energy, and likely to spread into other asset
classes. There is still considerable consternation
about the effectiveness of raising interest rates at this time.
This
observer would argue that at its best, previous
disciplines designed to create (artificially) low interest rates have simply
"maintained" a buttress to potential economic pitfalls, while
propelling stock market valuations up to unnecessarily inflated levels. At
worst, low rates have caused a flow
of funds into asset classes that should have depreciated from the weight of
their own insignificance or underperformance.
By making stocks the only game in town, monetary policy-makers have
inverted the reward paradigm and forced many to take on too much risk.
Maintaining
a stimulus bias to heighten trade and commercial interests compromised a
delicate balance between nations, the result of which was to marginalize the
competitiveness of the global trading platform.
All
in all, I would contend that the manipulation of interest rates, currency, and
capital has created a race backwards rather than an
incentive-laden
competition forwards which benefits investors. A strict adherence to "austerity
measures" post-recession has dampened the vibrancy of economic recovery by
impeding higher, and more competitive interest rates, thereby depriving many
investors a safe haven with maximum return for their cash reserves.
Too
many asset classes have indiscriminately rallied because of low rate policies
during the last five years. It is interesting
that low rates have historically reflected slow
economic growth and financial weakness.....certainly
not the situation we are in now. At some
point, it would seem, then, that we must reconcile what we know to be true
about the economy and policies which stand in direct contradiction
Something
is amiss. Markets must find a
direction...a theme....and stick with it.
Recovery, or no recovery? For
many, the data are simply unreliable and counter-intuitive to what they see in
their own lives. We must also be aware,
however, that these variables can create additional volatility and hesitation
in the financial market's daily activity.
Seemingly
uncoordinated global economic monetary moves raise the potential for investors
to lose patience, perspective, or hope.
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