Oh yes, they did it again. Central Banks won this last battle. They squeezed out all the shorts and non-believers in the markets. Next war I am involved in (hopefully none at all), I don’t want the Pentagon to lead the troops on my side of the conflict. I want the top central bank chiefs in my war room. Napoleon couldn’t have made a better choice of generals. Don Corleone’s consigliere was a “benedictine contemplative nun” when compared to them.
I entirely disagree with their keynesian roadmap -and their ethics-, but I have to respect their professionalism. They all know the content and extent connoted in the expression “whatever it takes”. In fact, doing “whatever it takes” to protect “Aggregate Demand” (and market levels and the actual establishment as a byproduct) is the central wording in their oath. They forcefully implement what they deem necessary to achieve their goals. It was a tremendous coordinated effort this last week. ¡¡¡¡ Bravo !!!! I am impressed.
Now I understand why I will never be named a central banker. I do not have the guts, and my grab bag of principles is bulky. Right or wrong, I say what I think, and I do what I say. In a stable way. Right or wrong, my structural position in financial markets rarely changes, unless there is a changing reality. Flexibility is essential for survival, but one must have a solid theoretical underpinning for his economic thoughts. And my point of view certainly does not change in a fortnight.
On a more philosophical note, in truth the trouble is I disagree with the wording “whatever it takes” in most ambits of life. As a rule, I think the end does not justify all available means. Much less so, when in an area like monetary policy.
Looking back at the last couple of days of trading, you can underwrite whatever option suits you best. Central Bankers are the best market timers in history, or the infamous Greenspan put is alive and well. Maybe it is a combination of both. Trading in top financial institutions must be fun. No more than one or two down days every quarter. How is a provincial economist in the north of Spain going to beat that? It helps me remain humble. ¡Aren’t they smart!
Take the the tough markets of the last trading days, when the “common knowledge game” was under pressure. Some comments on the tape by Williams and Bullard made for an instant read. Surprising, to say the least. Last post, I was nearly dogmatic about the fact that Qeternity was finished for good. I was wrong. QE will be used, together with the rest of the tools in their tool kit, “forever and ever (amen)” -if necessary.
Markets were clearly oversold, but a full 110 S&P 500 retracement, and a complete turnaround in risk spread direction, is a little bit too much for my faith in market technicals. Of course I am always short of faith; I do have to improve that. Continue reading