Ben’s predictable prediction panics markets as predicted

Posted: June 23, 2013 in Global Economy, Stock Markets
Tags: , , , , , , ,

“I guess I should warn you,” once said Alan Greenspan, chairman of the US Federal Reserve before Ben Bernanke held that position, “If you think I am making myself clear, that probably means you have misunderstood me.” Ben Bernanke doesn’t say things like that. When he took over at the Fed he vowed to say it straight, tell it like it is, and avoid launching into jargonese whenever possible. And that is how it has panned out. Take monetary policy, for example.

Ben had spelt it out in terms a child could understand, (well at least a child that had studied economics): monetary policy would be tightened under certain circumstances. He then defined what those circumstances were and they now appear to be emerging. This is not new; the data had already been set before us in the full light of media scrutiny. Mr Bernanke has reacted the way in which he always said he would, and the markets react as if the Fed chairman has grown two heads, or taken on an alter ego.

As has been pointed out here many times, the news out of the US has been good of late. Notwithstanding the fact that in Q2 the US is likely to see less growth than in Q1, signs are afoot that the US economy is slowly returning to normal: to pre 2007, or even pre 2004 type conditions.

This is not bad news. It is good news. The US consumer, so long the central hub in the global economy, looks set to be moving back to the centre stage. Companies that export their wares to the US, and US companies that sell their wares to the US consumer can celebrate. There may be a knock on effect too, as companies benefit from a resurgent US themselves see growth rise, giving their suppliers reason for hope.

What do the markets do? They panic.

They panicked because when Ben Bernanke announced that the Fed will be forking out $85 billion a month purchasing bonds – otherwise known as QE – (QE3, or maybe 4, depending on how you define these things), he said that once the economy improves, and unemployment falls to a certain level, the QE campaign will be cut down, and eventually stopped.

They panicked because Mr Bernanke confirmed that he hasn’t changed his mind and that if things carry on improving, QE will be reduced later this year (September being the expected month).

He also confirmed that if things carry on improving next year and the year after that interest rates may rise in 2015.

Certain things in life are predictable, Mr Bernanke’s comments yesterday, or at least their inference, falls in this category.

But the markets are nervous. They fear that in a world where interest rates are higher and US consumers have less debt, more jobs and spend more, certain assets – propped up as they are by bubble-like money flows – may fall or even crash.

The obvious candidates for such falls are US and UK bonds; equities too, but to a lesser extent. The markets themselves are worried about emerging market debt.
Why they are worrying now, over something that was always inevitable is a puzzle. It just goes to show that the markets are as wise as a wise man who has had a lobotomy.

And talking about wise, the latest wisdom out of the Eurozone is that the crisis is nearly over.

Certainly the latest PMI, produced by Markit, suggests the region is now merely in recession, as opposed to being in deep recession.

But here is a tip to the wise; maybe as bond yields rise, as QE comes to an end, it will be indebted Europe that suffers the real woe.

Of course if the ECB launches QE when the Fed stops, that may just be enough to allow the euro area to follow the US into recovery (two years or so behind, but follow nonetheless).

But the ECB is far too wise to do that. Remember Mario Draghi once said the ECB will do whatever it takes to save the euro. But just in case you think Mr Draghi was making himself clear, just remember that he actually said: “Within our mandate, the ECB will do whatever it takes to save the euro.” The markets probably misunderstood what that meant.

© Investment & Business News 2013

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