I may be mixing up my metaphors, but the bull market in stocks is showing more signs of a Jekyll and Hyde split personality.
Of course, it’s been manic since the beginning as panic-attack selloffs have been followed by euphoric relief rallies. The mood swings between risk-on, risk-off, and back to risk-on have been occurring on a regular basis. With manic depressive disorder, episodes can be triggered by a major trauma.
The Trauma of 2008 was certainly one of the most severe financial crises in our lifetime. Ever since then, it hasn’t been too hard to scare the living daylights out of investors about an imminent “Endgame” or “Ice Age” scenario. In the past, fears of a repeat of a 2008 crisis or worse abated when the major central banks took turns injecting mood-altering liquidity into the financial markets, resulting in the transformation of Mr. Hyde back into Dr. Jekyll.
Again mixing metaphors, during the panic attack at the start of the year there was widespread fear that central banks had run out of ammo. The ammo they were loading into their bazookas seemed either to have lost its fire power or was backfiring or was just blanks. ECB President Mario Draghi actually addressed this issue directly in his press conference
last week when he responded to one question as follows:
“Your … question is about the perceived lack of power of central banks, and it allows me to address the other … sources of pessimism as far as central banks are concerned. One is, ‘Ah, central banks have no ammunition left. Central banks have no policy instruments.’ But I think the best answer to this is being given by our decisions today. It’s a fairly long list of measures, and each one of them is very significant and devised to have the maximum impact in boosting the economy, and the return to price stability. So we have shown that we are not short of ammunition.”
Draghi shows no sign of a split personality disorder with his unwavering commitment to do whatever it takes to defend the euro and revive the Eurozone’s economy. This year, the bull market’s split personality is likely to be driven by the split personalities of Donald Trump and Janet Yellen.
Consider the following:
Donald Trump is likely to be the presidential nominee of the Republican Party. Hillary Clinton is likely to be the Democrats’ pick, if she isn’t indicted. Donald is a schoolyard bully who is likely to beat up Hillary over the corruption issues that she has accumulated over the years. She is likely to appeal to all the minorities, and perhaps the majority of women, who have been disparaged by Trump. The winner will be whoever succeeds in getting their base — especially its members with the baser instincts — to vote.
Clinton is a known and predictable political operative. The markets aren’t likely to react badly to her election. Trump is a known unknown politician. He has a known record as a businessman, but no track record at all as a politician. Despite his claiming to be a great unifier and negotiator, during the campaign so far he has been anything but. The markets might react badly to a new president who is against free trade and a free press, and intends to deport 11 million people.
Then again, there seems to be another Trump, who is reportedly reasonable and charming. Vouching for him in a March 14 N.Y. Post article
is Peter Kalikow, the president of the New York City real estate firm H.J. Kalikow & Co., LLC, and past owner and publisher of the N.Y. Post.
Although he is supporting Kasich, Kalikow writes: “In the interest of full disclosure, Trump and I have been friends for many years. I greatly respect and admire him. And to those who are taking cheap shots at him by suggesting he’s a racist, I can tell you from firsthand experience he demonstrates equal opportunity in his businesses. So, my advice to those who are attempting to deny the nomination to anyone who has garnered the requisite delegates to be our nominee is this: Stop! Let’s honor the democratic process that has served this country so well and keep it in the hands of the voters, where it belongs.”
By the way, I had lunch in NYC with the president of a major bank last week. He told me that he has done business with Trump and always found him to be an honest businessman and a gentleman. Then again, power does have a tendency to corrupt.
Fed Chair Janet Yellen undoubtedly has the cleanest record in Washington. She is extremely civil and very smart. Yet as Fed Chair, she must be torn between her very liberal political instincts and her responsibility to balance the diverse views on the FOMC to implement monetary policy. Her dilemma was neatly discussed in a March 15 Bloomberg article
titled “Stanley Fischer and Lael Brainard Are Battling for Yellen’s Soul.”
Here are the main points:
“Yellen is caught in a tug of war between Fischer and Brainard. At stake is the Fed chair’s willingness to embrace a policy stance that accepts the risk that inflation will overshoot the U.S. central bank’s target. At the moment, Brainard has the upper hand in this battle. And she has a new weapon on her side: increasing concerns about the stability of inflation expectations. …
“So, given the Phillips curve framework’s consistency among policymakers, why delay further rate hikes? After all, the labor market appears poised to deliver still-lower unemployment rates in the months ahead, a growing body of evidence points to accelerating wage growth, and even core-PCE inflation — the central bank’s preferred measure — has picked up in recent months. In other words, it seems like the Fed’s plan is coming together.
“The challenge for further rate hikes is that recent financial instability has exposed the downside risks to the forecast. This has been a prominent concern among policymakers who prefer a cautious approach to further rate hikes. …
“But Brainard & Co. are crafting another position to sway Yellen into the dovish camp-one that leverages the chair’s existing sympathy for Fischer and his Phillips curve view. The twist is that Brainard and her allies are shifting focus away from ‘resource utilization’ toward ‘inflation expectations.’ Anchored inflation expectations are an integral part of the Phillips curve story as they provide the central tendency for inflation over time.”
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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