MorningWord 4/18/16: Aheadless of the Curve

by Dan April 18, 2016 10:03 am • Commentary

Market forecasts are like belly buttons, everybody’s got one, innies and outies. And we know that equity markets spend most of their time rising in value. So if you are in the business of selling financial products and services it makes sense to be on the side of the most probable market move at any given time. You’re right most of the time and when you’re wrong so is almost everyone else. Safety in crowds.

On the other hand, warning of the risk of a correction or even a crash is a sure fire way to be the boy who cried wolf, as there can be long periods of time between meaningful market corrections. And even those that get the crash call right don’t necessarily get the timing exactly right, being early on the calamity call and a little late signalling the all clear.

Once such economist in the ’08 Financial Crisis was David Rosenberg of Merrill Lynch (now at Canada’s Gluskin Sheff). In the mid 2000’s, before the Great Recession, Rosie (as he is affectionately known) called the housing bubble and then remained steadfast about his belief that the world needed less debt all the way into 2013 (he changed his tune in July 2013 when the SP500 (SPX) was below 1700 (read here). He was labeled an Uber Bear, then got it right, but then late to get on the QE/ZIRP train before eventually getting on board and being right for a few years, now labeled a cautious, but thoughtful bull.

All that was a set-up for you to read a piece he published over the weekend:

Janet Yellen’s use of one word tells us something has gone wrong

In it he rethinks his optimism on the continued impact of unprecedented monetary policy. The conclusion is one that other sharp as a knife market commentators like Allianz’s Chief Economic Adviser, Mohamed A. El-Erian would most certainly agree. Heck, El Erian wrote a book about it The Only Game in Town. (it’s great, read it),

As Rosie points out, central bank policies that were meant to avoid a global financial collapse and/or depression, are losing their effectiveness.


So he’s not a fear monger, and I don’t want to be seen as one either. I’m simply pointing out that many of the sharpest minds that I read are turning into a chorus, and questioning the continued effectiveness of monetary policy that delivered us to this uncertain time with diminishing returns (and possibly adverse effects).  Everyone, and I mean everyone, has a vested interest in keeping this ship afloat and are willing to do whatever it takes to do so. The problem is in doing so, long term damage is being done by possibly making the next crisis worse by neutering the very policies that the world will once again expect to be used to combat the next crisis. By refusing to even test if their policies have created any sort of sustainable growth, the central banks have forced themselves to move to increasingly unconventional methods like negative interest rates. This speaks to one of my favorite and fairly prescient warning from the WSJ’s John Hilsenrath on August 17th, 2015:


Central bankers are in a race against time. We know that a recession is coming, possibly another credit crisis and most certainly a market correction that could rival the protracted bear market that occurred in the aftermath of the dotcom bubble burst, or violent 18 month crash in the wake of the financial crisis. By aggressively fighting it beforehand, they may run out of bullets when it actually happens (and it will happen).  So will the current course of monetary policy leave an effective firewall when the next crisis hits?