The fact is markets had gone up too far and too fast … A number of different factors have combined to create the impression of a co-ordinated slide, but the causes of the various market wobbles are subtly different. The proximate trigger for the market slide was Ben Bernanke's appearance before a Congressional committee at which he hinted that the Fed's monetary largesse will not go on forever … – UK Telegraph
Dominant Social Theme: Central bankers sure have a lot of clout.
Free-Market Analysis: Here is a dominant social theme so subtle and powerful it is not even commented on. This article makes much of the Fed's Ben Bernanke's power when it comes to influencing markets. But the idea that one man and his backers should have so much clout is never even brought up.
Instead, we get a long analysis about how Bernanke moved the markets and then how his speech helped throw it in reverse. Finally, we get a vague summation that the recent market sell-off, which has continued today, was just because the markets "went up too far and too fast."
A number of different factors have combined to create the impression of a co-ordinated slide, but the causes of the various market wobbles are subtly different. The proximate trigger for the slide was Ben Bernanke's appearance before a Congressional committee at which he hinted that the Fed's monetary largesse will not go on forever. This should have come as no surprise to anyone, but the market was blind-sided. Painful memories of the disorderly surge in Treasury yields in 1994 were rekindled.
Bernanke's comments and the fear of monetary tightening coincided with an actual rally in 10-year government bond yields in Japan, from around 0.3pc to more than 1pc. That might sound neither here nor there, but for a country labouring under government debts worth around twice economic output, it was enough. In the US the new buzzword is "tapering", the reining in of quantitative easing that investors fear could undermine the liquidity-fuelled bull market that is now four years old.
It is sensible for the market to worry about the end of stimulus and rising bond yields, but I think it is wrong to overstate the risks for a few reasons. First, QE is not going to end for some time. Bernanke has made it clear that he will not take away the punch bowl until unemployment has fallen to 6.5pc. Friday's non-farm payrolls, showing a modest increase in the unemployment rate to 7.6pc, suggest that this threshold remains at least 18 months away and perhaps longer.
Second, rising bond yields – which are an inevitable consequence of an economic recovery and policy normalisation – are not necessarily bad news for equities. The key is the pace of the rise and whether or not it is expected. Of the four tightening cycles for US interest rates in the past 25 years, only 1994's was unexpected and so disorderly. In fact, in recent years the link between rising bond yields and equity markets has been a positive one. Shares have risen when bond yields have increased.
… The US is recovering but the Fed will not move too soon – if anything, tightening will come too late. In both cases, the market has been spooked by its own shadow. So what's the third reason for the correction? It's the simple one that is not often cited because, unlike most post-rationalisations, it sounds too obvious. Markets had gone up too far, too fast and investors were looking to take some money off the table.
On the surface this sounds like a rational analysis. But what it leaves out is why central bankers should have so much power to move markets. It then makes a direct correlation between the probability that Bernanke will not tighten for another 18 months and thus the global rally may last at least that long.
This sort of analysis is quite in line with our perspective: The modern investment market is driven by monetary policy and not much else. Sure, within the context of larger moves, there are promising investments to make (or at least companies seen as having value at a certain price), but in a truly free market, money stuff would be privatized and the ability of one man or group of men to move the markets would be far diminished.
Within larger contexts, markets are efficient and are the products of vast inputs. But surely the largest input is central banking policy itself, which influences the investments of billions and the valuations of multinational corporations as well.
This is seen as so natural it isn't even commented on in the mainstream press – except under extraordinary circumstances. Eventually, we believe, it will have to be.