Via IceCap Asset Management’s Keith Dicker and John Corney,
When it comes to discombobulated people, the financial World has a bunch of them. Leading the pack during the roaring 1990s was the King of Confusion himself – Alan Greenspan. His money reign at the US Federal Reserve was highlighted by bailing out Wall Street’s biggest hedge fund, which planted the seed for the dot-com bubble.
Unfortunately for the market, only the combination of retirement and hindsight allowed Mr. Greenspan to become less confused when he admitted he had found a “flaw” in his economic philosophy.
Next up on the baffle scale has to be the Eurozone. The decision in 1995 to create a common currency was actually brilliant. The final watered down product – not so much.
For the euro to work, it appears you do in fact need a single government entity with the power to institute tax policy and government debt issuance. Fifteen years later, half of Europe remains discombobulated as to why they needed the bailout in the first place, while the other half remains discombobulated as to why they have to bailout the other half. Once again, confusion reigns.
On a broader scale, during the last three years, money printing and bailouts have saved financial markets no fewer than 6 different times. Those who identified these risks have spent many sleepless nights figuring out ways to get through this mess.
Those who did not identify these risks, carried on as if it was the 1990s all over again – buy, hold and prosper.
Determining who was right is no simple feat. Perhaps famed American journalist Edward Murrow got it just right when he said, “anyone who isn’t confused really doesn’t understand the situation.”
For now, as markets roll into the fall, investors, politicians, and central bankers remain just as discombobulated as ever.
And if you think you are confused…
Try being Ben Bernanke for a day.
Just three months ago, Mr. Bernanke stunned the financial World by announcing the Federal Reserve had seen the light and it was indeed time to put an end to all of this money printing nonsense. The market reaction was anything but discombobulated – everything declined in value. Many bonds declined between minus 2-10%, while stock markets around the World were clobbered between minus 10-20%.
Ben Bernanke told a story that the US economy was accelerating, new jobs were abundant, and inflation was starting to increase. In central bank school, these are the main criteria for putting on the breaks and slowing this economic train down before it creates more bubbles and more unintended consequences.
The message was loud and clear – be prepared for higher interest rates and adjust accordingly.
Then a funny thing happened, the Federal Reserve returned from their summer holidays and discovered that the economy actually wasn’t accelerating, new jobs were mostly low paying and part-time, and inflation numbers were lower than expected.
In central bank school, these are the main criteria for pushing the pedal to the metal before the economy completely stalls.
Of course, this conclusion and the Fed’s resulting reverse decision will go down in history as the most discombobulated moment in monetary history.
Over the last 3 years, the risk in financial markets have clearly laid within the stock market. Each and every time stock markets teetered, central banks rushed to the rescue by printing more money to save the day.
Today, the risk is different. With long-term interest rates on the rise, and a distinct lack of any solution to cure Europe’s debt woes, risk is now shifting towards the bond market, and the non-USD bond market to be exact.
The confusion created by the Fed’s decision to continue printing money will not return market risk to its previous state. Interest rate risk remains at elevated levels, and when combined with a non-accelerating recovery portfolios must consider the reaction of private capital and where it will shift next.
IceCap’s Full Monthly letter below: