It should be no surprise to anyone reading these comments that one of the primary keys to understanding market direction in recent years has been understanding when policy intervention would occur. The market has been like a sobbing baby who goes through fits and starts swinging from a position of euphoria, to concern, to full blown weeping at the feet of policymakers. And the market has tended to get what it wants in recent years. The market collapses on fears of policy failure or economic decline. Policy makers become concerned they’re behind the curve. Then the initial threat of policy intervention halts the market downturn and the actual intervention calms nerves for a while. Things settle back into place, the economy looks to be settling and then boom, the Euro crisis (or some other exogenous shock) hits. Rinse wash repeat.
In a note this morning Goldman Sachs touched on this phenomenon:
“Even more important than these in the short term, we think that after two months of negative data, bad markets and little policy response, the pendulum is likely to swing back towards policy intervention. In the US, we continue to expect some fresh easing moves at the June 20 FOMC, and recent remarks by Fed officials (including Janet Yellen last night) have taken a more dovish tone. In Europe, we may see announcements of funding aid for Spanish banking recapitalization. More proposals, and atmospherics, on deeper institutional arrangements – deposit insurance, fiscal risk-sharing and “banking union” – are likely as we move towards the June 28-29 Eurogroup summit. And while the Greek election result is likely to begin a messy negotiation process, the market already expects that and we have argued that concerns about an imminent exit – which gripped the market a week or two ago – are overblown. China’s easing process has taken another step forward too, with this morning’s rate cut. Beyond these areas, hints of Japanese FX intervention or of shifts back towards QE in the UK have more plausibility than they did a couple of months ago. Even if these moves ultimately have limited effectiveness, we think markets could easily continue yesterday’s move higher if policy activism increases. On that basis, Thomas Stolper and team cut a controversial but successful short in USD/JPY that they have recommended since mid-March, while Noah Weisberger and team also cut a more recent short recommendation in US consumer discretionary stocks.”
The important thing is, the market is not the economy. Most investors don’t connect the dots here. They whine about policy and get fixated on the moral perspective of what should and shouldn’t be done (I whine about policy all the time because I think it’s been rotten in recent years). And that’s great from a policymaker or a voter perspective, but it’s USELESS from a market practitioners perspective. Ignore the bazooka effect at your own risk. It’s on the table and central bankers are ready to pick it up.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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