Losing Control
Markets are beginning to signal that policy makers are losing control. Many second-order-effects of the unprecedented and experimental global actions taken since the 2008 crisis are beginning to manifest. There are always causes and effects that develop; but they do so at different speeds. Many actions in recent years have prioritized ‘benefits today’ over ‘consequences tomorrow’. ‘Tomorrow’ is approaching ever more quickly. There is no ‘free lunch’.
Market damage and volatility due to policy interference, or due to the deliberate influence of security prices, are a shame. Markets should ideally operate with unencumbered fluidity. Markets should operate in a manner where adjustments to new information allow buyers and sellers to rapidly, and seamlessly, find a natural clearing price. Authorities and regulations should be like good referees in a soccer match; they provide the conditions for a fair match, and you rarely notice their presence.
- The beginning-of-the-end of official control happened earlier this year when the Swiss National Bank (SNB) retracted its currency-peg-promise, triggering a 40% move in the G-7 currency in 10 minutes.
- In early May, shortly after the SNB event and the launch of ECB QE and EU negative interest rate experiments, the EU bond market became dysfunctional. The absurdity of sustaining $4 trillion of negative rates came into focus. The German 10-year Bund moved from 0.05% to 0.75% in under a month.
- A series of Greek policy and troika bailout mistakes – actions that never resulted in a realistic and sustainable solution – are now culminating toward a tipping point (more tomorrow).
- Chinese authorities that have allowed and encouraged an equity bubble to manifest (and other central banks for that matter) are starting to see how ‘bubble blowing’ typically ends. Other central banks are hopefully watching. Chinese equities have lost $3.2 trillion in value in 30 days. To put this into perspective, this is equivalent to the entire stock market capitalization of Germany and France combined.
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