The media continue with this focus on the timing of the Fed’s QE3 announcement. This now seems archaic. Global central bankers, whether Draghi at the ECB, or the Bernanke Fed, the Bank of England, the Swiss National Bank (SNB), or others, now actively pursue the power of “open-ended” monetary and market support/intervention. No quantification necessary. This escalation to unconstrained monetary stimulus was the motivation for last week’s “Do Whatever it Takes!” Drs. Draghi and Bernanke have done nothing less than to signal to the marketplace that they at any point and to any extent deemed necessary will be there to backstop the markets. Worries – albeit those associated with so-called “exit strategies” or inflation risks – have been completely overshadowed by a resolute determination to avert another global crisis. It may have been subtle; it’s no doubt radical. The Draghi and Bernanke “puts” have been significantly bolstered and manifestly communicated. Sophisticated global speculators operate knowing central bankers are unequivocally determined to quell so-called “tail” risk of illiquid and faltering securities markets.
I know most would today consider this whole line of analysis wacko lunatic fringe stuff. I am, as well, confident that in, say, five or so years’ time analysts will look back at this period and state it was obvious that Fed policy had been fueling a Bubble in Treasury and other securities markets. We’ve seen it all before. Yet with markets rallying strongly over the past month and with heady 2012 gains only mounting, the bullish spirit has triumphed. Talk has turned to a new secular bull market, along with visions of the “American Decade” (and century!). If only Washington would get to work on the fiscal issue, sound economic fundamentals would be free from worry – or so the thinking goes.
I’m the first to admit that it’s easy to dismiss the view that, only a month or so ago, rapidly escalating European debt tumult was at the brink of unleashing the forces of global financial and economic crisis. The path from illiquid Spanish and Italian debt markets and a crisis of confidence in the euro to a more globalized panic was not so difficult to discern: illiquid markets, de-risking/de-leveraging dynamics, capital flight, systemic banking stability issues, derivative and counterparty concerns, hedge fund problems and a resulting abrupt tightening of global financial conditions. Draghi surely believed he had no alternative than to go radical – and now Bernanke and others are as well ready to do whatever it takes…
Draghi clearly has his plan – and his wingman at the Federal Reserve. There may be no turning back. At the same time, the European financial, economic and political issues may very well prove insurmountable. Yet why would the speculator community spend much time fretting the next round of “risk off,” not with global central bankers waiting anxiously with bazookas fully loaded. In the end, I suspect policymakers will regret inciting this particular, potentially unwieldy, phase of “risk on” market speculation and financial mania.