The Independent Market Observer

Policy Maneuvers Losing Power to Steer the Markets

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 10, 2015 2:55:00 PM

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FederalReserve_4Every year or so, I do a postmortem of my analyses and predictions in order to figure out where I was wrong, and how to avoid making those mistakes in the future—a useful, albeit uncomfortable, exercise. One of the biggest mistakes I’ve made in the past decade has been to underestimate the power of governments to influence markets.

In the aftermath of the financial crisis, for example, I stayed bearish for too long, not recognizing the will and ability of the Federal Reserve, among others, to change the rules and also the outcomes. While I had focused exclusively on the economics, politics was ultimately the controlling factor.

Since then, I’ve been much more bullish in response to the global policies that continue to drive economic and market expansions. Recently, though, I’m seeing a growing need to refocus on economics.

Policy takes a backseat, here and abroad

The U.S. Domestic policy, although still very expansionary, is now shifting to a more neutral stance. At the same time, we’re seeing slowing in many economic indicators, which suggests that the effects of earlier policy decisions may be starting to fade. With flagging growth and a Fed set to begin raising rates, economic factors should return to center stage.

China. Looking abroad, the Chinese government has been very successful in stimulating and managing its economy, but we’ve all seen its recent stock market woes. Although Beijing appears to have stopped the hemorrhaging for the moment, the extreme nature of its latest policy actions suggests that such moves are largely played out. The fact that economic growth failed to respond to the last round of stimulus also suggests a limit to the government’s control. Economics has returned as a constraint in China.

Europe. In Greece and Europe as a whole, politics is also giving way to economics. The new Greek reform proposal is reportedly almost identical to the one its creditors last put forth; despite the political “no” in the Greek referendum, Greece has apparently been forced to face economic facts. And it goes both ways, of course: the creditor countries are now recognizing economic reality by talking about debt relief. 

Politics and policy are still part of the mix, to be sure, and I won’t make the mistake of ignoring them again. But economic limitations are becoming increasingly apparent across the board.

Shift in focus could make for a bumpy ride

In the U.S. and the rest of the world, future growth will have to come from fundamental improvements rather than policy legerdemain. Central banks, which have supported markets for the past several years, will no longer be able to levitate. Monetary policy and debt have largely run their course.

Europe may still have some policy running room. Here in the U.S., though, I will be zeroing in on jobs, wages, and the consumer. Nowadays, that’s where the money is, not at the Fed.

Frankly, the transition may be rocky. The world has grown accustomed to relying on central bankers as Mom and Dad. Greece is far from the only teenager with a credit card. At the same time, the shift from politics to economic factors should end up being a positive development—and one that highlights the success of government policies since the financial crisis.

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