Markets can be very peremptory. If they are expecting something specific like the introduction of eurobonds, or the start of QE3, or measures that really will generate new jobs, and they don’t get it, they react by shedding value. It is not terribly clear what those at the helm can do when they know they are not going to go in the direction the markets are expecting, yet the occasion calls for them to say something.
We had three instances in the course of a few days, of leading figures attempting to redirect the attention of the markets to positive things while simultaneously not giving the markets the one thing that they really wanted from that particular speech and that particular speaker. The speakers were: Ben Bernanke (no QE3); Barak Obama (a jobs pledge that was judged to be too weak) and the ECB President Jean-Claude Trichet (no eurobonds). In each case the markets reacted by tanking quite spectacularly.
Bernanke’s speech, made before the US Federal Reserve announced Operation Twist, sought to strike a balance between giving a realistic picture of a US economy characterized by weak growth, and finding some real positives to console his audience. For example, on the plus side, he noted that:
"…with commodity prices coming off their highs and manufacturers’ problems with supply chains (following the Japanese earthquake and tsunami) well along towards resolution, growth in the second half (of the year) looks likely to pick up.”
Did the markets like that? Not at all. They, like Bernanke, have grasped that there are “more persistent factors… holding back the recovery”, not least of which is the US housing market, which is in a dire position and in no shape to generate any pick-up in the economy. So what the markets wanted was action, more stimulus, if you please. All Bernanke would say at the time was that the FOMC would consider “possible actions” when it next met. Not good enough, was the market response. They knew Operation Twist was coming and they wanted it to be significant. Ironically, when it came it was bigger, at $400 billion, than most commentators had predicted, but it coincided with a severe bout of euro sovereign jitters and the main message the markets took from it was that if the Fed was doing this, then things really were bad – hence the further massive sell-off in global stocks that followed.
Then there was President Obama’s speech announcing The American Jobs Act, an Act designed “to put more people back to work and more money in the pockets of those who were working”. It includes things like tax breaks for companies who hire new workers and cuts in payroll taxes – an enterprise with 50 employees would see an $80,000 tax cut. He also talked a great story about more infrastructure spending to improve America’s crumbling bridges and road network, and repairing and modernising at least 35,000 schools. But the markets looked at the scale of the existing deficit and at the impasse with the Republicans over the debt crisis and decided that (a) he didn’t have much to give away and (b) whatever he did try to do would be blocked. So they tanked.
Finally, ECB President Jean-Claude Trichet, who seems to have developed a special adverse relationship with the markets, gave the keynote speech at the Institute Montaigne, taking as his theme the fact that we are now three years on from the fall of Lehman Brothers. Again, Trichet tried to redirect market attention to the positives and trotted out, yet again, the thought that things would have been much worse if the G20 had not combined to address major weaknesses in the financial and fiscal spheres. This, apparently did not amuse the markets, which seem to consider that things are now pretty bad once again and that, once again, some serious intervention is required – like the introduction of eurobonds, for example. Trichet did not promise any such thing and the markets punished him accordingly.
All three speeches are now fading into history. Bernanke has acted, Obama has tried and it seems likely, at the time of writing, that whether Trichet approves or not, the Eurozone’s political class might finally be about to do something serious, such as agreeing a 50% Greek default and finding a way of ringfencing the troubles of Ireland and Portugal, and propping up the credibility of Spain and Italy. They may also be prepared to recapitalize the European banks sufficiently to make the latest bout of euro jitters fade for a while. We shall see. The big lesson from those three earlier speeches though is clear. The markets are no longer in the mood to tolerate political pap. They want substance, or else!
Further reading on the global economic climate:
- The Challenges to Slow Growth in the Advanced Economies Just Keep Coming by Stuart Thomson
- IMF seeks to define the lessons of the crash – part 1 by Anthony Harrington (blog)
- A One-in-Fifty-Year Event by Leigh Skene
Tags: American Jobs Act , Barack Obama , Ben Bernanke , ECB , euro , eurobond , European Central Bank , european debt crisis , eurozone , Fed , Federal Open Market Committee , FOMC , Greek default , Institute Montaigne , Italy , Jean-Claude Trichet , Lehman Brothers , Operation Twist , President Obama , qe3 , quantitative easing , Spain , The American Jobs Act , US economy , US Federal Reserve , US housing market