Jackson Hole was not the only thing on investors’ minds last week. But you would not have guessed that by reading the financial press.
Commentators on the markets were fixated on the topic — especially, on the prospect that Federal Reserve chairman Ben Bernanke would use his speech at the central bankers’ gathering last Friday to announce further monetary stimulus to the US economy, perhaps even a third round of quantitative easing.
Analysts and journalists alike attributed the markets’ movements last week almost entirely to expectations about this speech.
When an unusual pattern developed — with credit spreads widening on Monday, Tuesday and Wednesday, even as US and European stockmarkets rose — the only explanation observers could think of was that credit investors were not believing the Jackson Hole hype, while equity funds were.
This may have been true — indeed, investors may have been every bit as obsessed with Jackson Hole as the commentators.
But at such moments it is even more clear than usual that interpreting market psychology is an act of creation — spinning a yarn to satisfy the fantasy that markets are following an intelligible narrative.
Investors, analysts and journalists play this game all the time. But in the present market situation — one of generalised stress and anxiety, without any immediate factual crisis — the narrative looks particularly disjointed and lacking in credibility.
Always a non-event
How likely was it really that Bernanke would announce QE3 at Jackson Hole? Not very.
More importantly, how much difference would QE3 make to the real problems facing the US and global economies? Not much.
Quantifying the effects of QE1 and QE2 is as difficult as any other real world economic problem, because it is impossible to know what would have happened without the policy. But when the economic slump has been caused by overborrowing and interest rates are already at historic lows, it seems unlikely that growth, employment and house prices are being held back because long term borrowing costs are too high.
Government stimulus might be good for the US or European economies, if it could be applied in a way that would ensure the money was spent. Tax cuts or benefit rises for the poor fit the bill, as do public works. Unfortunately, by running deficits even in the good years, many governments have left themselves little room for stimulus when times are hard.
Classical economic theory suggests lowering interest rates should stimulate demand. But that has already been done. There is little reason to believe that more bond purchases by the Fed would stimulate household consumption, business investment or exports – the private sector drivers that could kickstart the economy.
That is why Bernanke was right, at Jackson Hole, to redirect attention back to government and the real economy – pointing out that “most of the economic policies that support robust economic growth in the long run are outside the province of the central bank”.
And the meaning is...
How did the markets react to this great event? They fell – and then they rose. The tale that investors had been betting on a QE3 announcement proved empty. Some commentators even said there was a “relief rally” when Bernanke did not mention QE3, because it suggested things were not as bad as had been feared. Investors seemed happy to discard all the metrics that had been assembled in advance to interpret the speech, and to adopt new ones.
After Jackson Hole, what will be the new market crazes? Barring any unforeseen disasters, the next one in the US is likely to be President Obama’s speech on September 5, at which he is set to make economic policy announcements. Expect a storm of hype speculating about what Obama will say, and how much he “needs to do” to satisfy the markets.
That will soon be forgotten, and markets will then begin fretting about the two day Fed meeting on September 20 and 21.
Don’t buy into it. The fantasy that current events are following a lively narrative, in which things that really matter are being decided this week or next, is as unreal as the dream that monetary policymakers — or even, policymakers in general — can solve the markets’ problems in the short to medium term.
The inevitable result of a debt binge is a long, painful hangover. It cannot be borrowed or inflated away. As one investor said last week: “There is only one magic wand — extremely strong, global growth.”
The real narrative of markets is that it’s going to be a slow climb out of slump and that the right policies are long term ones, which may take years to show results. But that’s the same story as last week and the one before. It’s boring. So brace yourself for one faddish obsession after another. At least it makes a good story.