Markets Now Testing 3 Hypotheses
“Don’t fight the Fed.”
–Wall Street mantra
“Don’t fight the Fed . . . unless the Fed is out of ammo.”
I don’t know if the Fed put is kaput, but the Chinese put — if there ever was one — certainly appears to be history.
What I’m referring to, of course, is the perception that the world’s most powerful central banks will do whatever’s necessary to put a floor under stock prices.
And that whatever they come up with will actually work (including such ad hoc tools as TARP and various other bailouts, ZIRP, and QE — short for “Quantitative Easing”).
Thanks to faith in such unconventional monetary policy (and the lack of any alternatives), investors globally have piled into stocks and bonds for years now.
Can you say, “moral hazard?”
Multiple Market Tests
So how come global markets are suddenly so rocky?
My take on the “recent unpleasantness” is that the violence and magnitude of the gyrations belie superficial explanations like a 3% devaluation in the Yuan, dropping oil prices, or the prospective end of zero percent interest rates (succeeded by . . . merely infinitesimal rates, possibly, maybe).
Instead, I think something deeper is afoot.
Specifically, investors are re-thinking these three, long-held assumptions:
One. The Chinese put is alive and well.
Two. The U.S. put is alive and well.
Three. If the Chinese put is toast but the U.S. put is still valid (the question of the hour), can the U.S. and the health(ier) global economies decouple from the sicker ones?
How will this all play out?
Stay tuned (and solvent) . . .
P.S. So much for market timing: if you Google “Fed put kaput,” the earliest search hits go back to 2010, when the Dow was more than 50% below where it finished today.