Markets Begin to Shrug at Obama, Bernanke

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Sunday 11 September 2011

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Tom Stevenson

Tom Stevenson: Summer of volatility gives way to a mood of quiet resignation The market's response to the speeches made last week by US President Barack Obama and the Federal Reserve chairman, Ben Bernanke, spoke volumes. Ben Bernanke's half-hearted attempt to talk up further monetary stimulus was no more successful than Barack Obama's jobs speech Photo: Reuters/EPA

By Tom Stevenson

8:00PM BST 10 Sep 2011

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After a decade and more in which investors have perked up like Pavlov's dog at the first suggestion of government or central bank intervention, they heard the pair's orchestrated monetary and fiscal stimulus on Thursday and simply shrugged. Was the "Greenspan put" finally laid to rest last week?

After a summer of volatility, a mood of quiet resignation has settled on investors and policymakers alike. The co-ordinated enthusiasm for action that characterised the initial response to the crisis in 2008/09 has evaporated as everyone recognises the political cost and sheer intractability of the growth/debt conundrum enveloping the developed world. There is no silver bullet. Solving the debts kills off the growth; fixing the growth means the debts balloon.

The answer sounds simple – solve the problems sequentially by stimulating growth today while putting in place a credible plan to rein in the deficits tomorrow. Let those that can do so ease off on the austerity and let those that can't do what they must. It would be simple if this was just an economic problem. But it is not – at heart it is a political one.

Obama's presentation of his package of tax cuts and infrastructure spending could hardly be faulted. He has cleverly boxed his Republican opponents in by challenging them to reject, a year before a Presidential election, legislation that is aimed squarely at getting America back to work. It would be like running for office on an anti-Motherhood and Apple Pie ticket.

But resist it they will, to the extent they can get away with doing so. The fact that the reality will, as a result, fall short of the $450bn (£283bn) headline figure, and the savings designed to pay for it prove elusive, explains some of the market's refusal to welcome the stimulus. The American people can see a starting gun being fired on an election campaign as clearly as anyone else. They also recognise that you can't hollow out your economy by exporting all your jobs to China and not end up with a structural unemployment problem.

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Bernanke's half-hearted attempt to talk up further monetary stimulus was no more successful, again for good reason. When the first round of quantitative easing was launched, US unemployment was around 9pc and inflation 1pc; QE2 came with the jobless rate still at 9pc but inflation twice as high; now QE3 is on the agenda with US businesses still not hiring and prices still rising.

A definition of madness is to keep doing the same thing and expect a different outcome. The difference between the market reaction to the hint of QE2 in the summer of 2010 and to the latest hint of further stimulus suggests that investors have a better grip on reality. They know that the developed world's problems are to do with the quantum of its debts and its uncompetitive economies. There are no short-term solutions to either.

Investors are passing through a kind of grieving process for the bull market of the 1980s and 1990s and this latest phase of acceptance is a key step in the right direction. I believe it takes us a bit closer towards the end of the long bear market which began in 2000. The weary sense of resignation hanging over markets tells me that we are getting closer to that point, but we are not there yet.

Risk assets such as equities are cheap. Whether you measure this on the basis of earnings or assets or income, shares are attractive at today's prices. For an investor with a sufficiently long-term outlook, they are indeed good value today. But it is unrealistic to expect them not to remain cheap for some time to come – until America works out how to grow sustainably, until Europe pulls together or gives up the attempt and until China accepts its new place in the world, with an exchange rate to match.

The period ahead during which the market learns not to put its faith in the next shot in the arm and accepts that recovery from a financial crisis is always long, slow and bumpy, will be testing for investors. And while this adjustment takes place, preservation of capital, diversification and income should be the priority.

Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63

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