Tags: fed | yellen | rate | economy

Global Markets Responding to a More Pessimistic World View Than Reality

Global Markets Responding to a More Pessimistic World View Than Reality

By    |   Friday, 12 February 2016 08:17 AM

Fed Chair Janet Yellen gave a very unclear answer to a question before the U.S. Senate Banking Committee about if a “rate cut” could be possible.

“I have not thought that a downturn sufficient to cause the next move to be a cut was a likely possibility …  And we have not yet seen, I would say, a shift in the economic outlook that's sufficient to make that highly likely. But in saying that, I also want to make clear that policy is not on a preset course, and if our perception of the risks and the outlook changes in a manner that did make that appropriate, certainly that’s something the committee would have to take into account in order to meet its objectives. It’s not what I think is the most likely scenario,” she said.

I'm sure many investors remain completely confused about where the U.S. economy could be heading and what the Fed's "road-map" is likely to be.

And when the fact markets “expect” now not a single rate hike this year, it should not be surprising the perception is growing the U.S. could be on its way for a serious economic slowdown in a world where stagnation seems taking hold, but is not confirmed yet, it’s normal many investors don’t know what to do, especially when they look at the ongoing volatility in equities, not only in the U.S., but also globally where they continue to fall.

Anyway, facts remain facts. After U.S. GDP growth for 2015 came in at 1.8 percent on a yearly basis, albeit down from 2.1 percent, the eurozone shows a GDP growth number of 1.6 percent for 2015 that was also down from 1.6 percent previously, nobody can say growth in both huge economic blocs their economies are falling out of bed.

That said, it might be helpful to many investors to try to get somewhat better insights why it is possible markets and the real economics are “disconnected,” for example in the U.S. and Europe.

In my opinion there are various reasons:

  • Investors should never forget equities are not the economy. In advanced industrialized economies like the U.S. and Europe, maybe 15 percent of GDP comes from listed companies;
  • Equity markets are disproportionately weighted to manufacturing, oil and the financial sector companies. Service sector companies are the majority of economies, but they tend to be small businesses;
  • Equity companies that make earnings from overseas subsidiaries can be subject to overseas demand concerns or currency moves without that having any impact on the real domestic economy, which is very important for U.S.-based investors because all the fuss that is spread around about a too highly priced U.S. Dollar and its impact on earnings.
  • Equity markets tend to react to initial data releases. Initial economic data releases are nearly always revised, and more often than not they are revised higher afterwards. In the last six years, U.S. GDP was revised higher from its initial estimate 74 percent of the time.

Equities may therefore be responding to a more pessimistic world view than is the reality.

The real world seems to be relatively indifferent to the hysterical pronouncements through various media channels.

Maybe it’s helpful to take notice “Google trends” does not have a single financial term in its top 10 searches in the U.S.

Now, it’s also a fact the real world would not remain indifferent if the problems in the financial markets spill over into banking lending. However, and until now there has been no evidence of this. For now, banks remain “happy” to lend, and indeed to increase lending. However if the global economic story is more one of credit cycles it’s important to keep in mind that ending of these cycles should impact negatively growth. When credit stops being provided then the growth outlook will also change.

Further than that markets’ influence on the real world should be put in their proper subordinate context.

Investors should not look at markets for getting an idea of the health of the economies in which they invest.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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Fed Chair Janet Yellen gave a very unclear answer to a question before the U.S. Senate Banking Committee about if a “rate cut” could be possible.
fed, yellen, rate, economy
Friday, 12 February 2016 08:17 AM
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