Central bankers need to learn respect
For a chance at economic recovery, Europe’s central bankers must learn to respect money markets like their US and UK counterparts, says Rowan Dartington Signature’s Guy Stephens.
During times of market stress, it is always wise to listen to what the gurus are saying. Warren Buffett in the US and Neil Woodford in the UK are good starting points. The former has been saying that he is buying this market and buying more now that it is cheaper – echoes of his saying ‘be fearful when others are greedy and greedy when others are fearful’ are ringing in my ears. Mr Woodford has also been quoted as saying that he doesn’t believe this bout of crisis will last for long and we could have seen the worst. Equity markets seemed to support that on Friday.
We must not forget the central bankers who have been silent so far. Christine Lagarde at the IMF has been backtracking, somewhat, from her comments on European economic weakness last week, saying that the markets have over-reacted – a lesson learnt perhaps?
US policy makers understand that calm in the markets is crucial for their economy and consumer confidence. The man in the street in America is very focused on the stockmarkets, partly due to their highly evolved 401(k) pension schemes, similar to our SIPPs, where far more of the population are highly engaged with how their pension schemes are invested. In addition, a far more significant portion of their wealth is exposed to money markets as property prices are relatively low due to the abundance of land.
Janet Yellen and the Fed realise that if a mood of market turmoil is allowed to persist, then the fear of an economic slowdown will sap confidence and become a self-fulfilling prophecy. There has been talk of the suspension of the final round of QE tapering but we view that as unlikely, as it would suggest that the Fed is rattled and sends a bad message. Far more likely are dovish comments on when the next stage will start, namely interest rate rises. We have already had a hint from Fed member Mr Bullard, who we have all suddenly heard of, as he has been very dovish indeed, although he is not a voting member.
In the UK, pre-occupation with the markets by the public is nowhere near as great. It features as a worthy bad news headline but we get little detailed analysis in the main news summaries. Even so, recognition that stable markets are important to consumer confidence is greater than it has ever been and, again, we have had some very dovish comments from a Mr Haldane, the Chief Economist at the Bank of England and his view is unlikely to be wildly different from Mark Carney. A cynic could even suggest that these comments from the periphery are deliberate ‘leaks’ of opinion outside of the normal meeting schedule and press conference diary designed to calm nerves.
Whilst the European elephant has re-entered the room of market focus, it is probably safe to say that the central bankers are well aware of the importance of their comments and of market confidence. It is no coincidence that economic recovery started first in the economy that respects its investment markets the most (the US), followed two years later by an economy where a Canadian banker took the reins with a similar focus (the UK), but is yet to feature in the region where there is least regard for the money markets (Europe) with a diet of penitence and austerity persisting regardless.
It took Japan 20 years to finally ‘get it’ and understand how international capital markets work and unleash massive QE. If attitudes don’t soon change in Europe, then they are also confined to the same fate – it may have to get a lot worse before the fear of inaction is greater than the fear of implementing QE.