"Nothing to fear but nothing to fear" Redux

by Laura Ehrenberg-Chesler on June 3, 2014

in equity market,Geopolitical,Investment Strategies

Over the past few years our favorite economist, Ed Yardeni, has written about periods where the market seems too complacent.  This is a worrying sign for many investors, in that it leaves room for sudden, outsized swings in the market; usually to the downside.

Today Ed”s piece is entitled “Fretting about Complacency”.  He enumerates four different indicators of this complacency, but it was the fourth that got my attention.  From Ed Yardeni”s piece today:

4)” Minsky’s moments. Economist Hyman Minsky is best known for observing that periods of low volatility are followed by periods of high volatility. That’s why so many stock market commentators are worrying that the current period of complacency could lead to a “Minsky moment” that would send volatility higher, increase the risk premium for holding stocks, and cause prices to sink.

 There are plenty of candidates for such moments right now. However, they tend to be geopolitical in nature. The saber-rattling between China and its neighbors over the South China Sea is getting louder. The civil war between Shiites best online casino and Sunni Muslims is spreading and intensifying. Negotiations with Iran to stop its nuclear and missile programs are not going well. The Cold War isn’t back, but relations between the US and Russia haven’t been this chilly since that period.

 Nevertheless, the latest geopolitical crisis in Ukraine had no discernable impact on stock prices. That’s because investors have concluded that President Barack Obama isn’t likely to use military force in response to such crises. That message came through loud and clear when he backed off attacking the Assad regime in Syria, which had allegedly used chemical weapons against civilians during August 2013.

 This benign-neglect (a.k.a. leading-from-behind) approach to dealing with geopolitical crisis has been bullish for stocks so far because the global economy should continue to grow as long as push doesn’t come to shove, and worse, in the geopolitical arena. The risk is that the lack of aggressive American responses to foreign aggression leads to more of it, until the result is a crisis that is bearish for the world economy and stock prices. One such scenario would be an Israeli attack on Iran’s nuclear facilities.

 Another Minsky moment could be a surprising rebound in US price inflation as falling unemployment boosts wage inflation. Debbie and I aren’t in that camp, but we are certainly watching out for this scenario. So far, the bond market isn’t in that camp either.”

Leave a Comment

Previous post:

Next post: