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'No Economic Reason Whatsoever' for Market Plunge

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Monday, 05 February 2018 07:13 AM Current | Bio | Archive

Equity markets moves are causing a flurry of rather sensationalist headlines.

For example, the Financial Times writes: “Equity markets tumble as global sell-off deepens.”

One thing is for sure, there is no economic reason whatsoever that has caused this. Economically, things are just doing fine. The world is on track for a trend like rate of growth.

Central banks are tightening policy, but unlike past policy tightening cycles, there is no desire to lower inflation at the moment and there is therefore no desire to reduce demand in the economy or to deliberately attack corporate pricing power.

That is for any investor a rather important distinction.

A modest rise in bond yields, in markets that are still manipulated, is hardly a surprise in the current circumstances.

The decline in equity markets does not, at this stage, warrant concerns about negative wealth effects where losses in equities would translate into changing consumer behavior.

The moves in equities have not been large enough to suggest an investor reaction yet, and equities are not that widely held, at least not in direct form.

A hint of central bank dovishness may be offered today as ECB President Mario Draghi speaks before the European Parliament. Normally, the European Parliament is not a center for attention, but the ECB President is (still) addicted to easing and may therefore attempt to present a somewhat dovish spin on the ECB monetary policy outlook.

The reality is that the growth and inflation story in the Euro area cannot possibly justify the degree of monetary policy accommodation that is currently applicated, but in the world of #hashtack economics, spin still goes a long way.

Because it could “become” an important subject for investors, but that isn’t still important enough to attract the attention of the financial markets, in Germany the world’s most tedious political crisis continuous.

The so-called “grand coalition” negotiations that were supposed to conclude over the weekend, which would then have allowed the coalition negotiators to move on the next stage when the government coalition deal will have to be voted on by the relevant parties.

However, there has been an extension to the negotiations as labor rules and healthcare come under discussion. Markets are still likely not to care very much at this stage of things.

As said here before, there is no reason for the U.S. consumer to be concerned at the moment about the state of things, unless, of course, that that consumer has been so foolish as to gamble on Bitcoin. The continuing drop in cryptocurrency prices can probably now be classified as a bursting of that particular bubble.

This process concludes a transfer of wealth from a large number of bubble-buyers to a small number of bubble-sellers. 

History has shown us, over and over again, that bubbles exploit the unsophisticated investor.

In economic terms, it doesn’t matter much if the buyer was sucked in to buying Bitcoin at around $8,000, even though that a Bitcoin bought at $8,000 is still in profit, the buyer will not recognize that gain, but instead concentrate on the notional loss from the $19,000 or so peak.

That’s generally how a loss version works and as a loss is twice as powerful as a gain, this is bad news for the individual gambler.

Collectively, there is little to know systemic risk as banks really haven’t really been involved in this bubble and the number of cryptocurrency fanatics has still been generally small enough in any economy that there will be no or little macro-economic effect.

Maybe there is some food for thought in what George Steinbrenner, an American business man in the 1930s said: “You shouldn't have any betting in the locker room at all, whether it's baseball or it's horses. You can't beat the horses. You can't beat any kind of gambling because they have the odds.”

Finally, Jerome Powell will be sworn in today as the 16th chairman of the Fed. He will inherit a U.S. economy in its third-longest expansion on record, with unemployment and inflation near historically low levels.

One of Mr. Powell’s daring tasks will be in contemplating how fast to pull away the proverbial punch bowl as the U.S. economy gains momentum.

On Friday, Dallas Fed President Robert Kaplan, who isn’t exactly a “hawk,” said 3 rate hikes this year is the base case, though “it could be more than that, we’ll have to see.”

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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One thing is for sure, there is no economic reason whatsoever that has caused this. Economically, things are just doing fine. The world is on track for a trend like rate of growth.
economic, reason, market, plunge
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2018-13-05
Monday, 05 February 2018 07:13 AM
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