Apr 11th 2012, 15:37 by Buttonwood
READERS will be familiar of the idea of the "Goldilocks economy", an idea that dates back to the 1990s. Just like baby bear's porridge, such an economy will be not too hot (resulting in inflation) or too cold (resulting in recession) but "just right".
Michael Hartnett of Bank of America Merrill Lynch has suggested the market may have been hit by a malign version of the syndrome, dubbing it Bad Goldilocks. Under this scenario
the economy is neither cold enough to provoke the quantitative easing that risk assets are so cravenly dependent upon nor hot enough to provoke losses in bonds that would inspire a wholesale rotation out of fixed income into equities and commodities
Indeed, one can trace the recent sell-off back to the March 13 Fed statement that seemed a little more upbeat about the economy, and thus damped hopes of QE. While equity markets are higher today, they have suffered a wobbly period since then. The US non-farm payrolls made things worse (although they might have revived hopes of QE) while the problems of Spain have revived worries about the European debt crisis. A lot of analysts are drawing comparisons with 2011, which also started well in market terms only to be hit by the Japanese tsunami and a spike in oil prices resulting from the Libyan civil war. Oil prices are still high but, thankfully, we have not had a repeat of Japan's disaster (today's earthquake off Indonesia so far seems much less damaging).
Ever since 2008, the problem has been that the economy (and thus the financial markets) has not been strong enough to stand on its own two feet but has been buttressed by remarkable levels of monetary and fiscal support. On the one hand, it seems mad to withdraw such support while the economy continues to be so weak; on the other hand, one wonders whether the economy will ever look strong enough to do without it.
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"Indeed, one can trace the recent sell-off back to the March 13 Fed statement that seemed a little more upbeat about the economy, and thus damped hopes of QE."
When a positive economic outlook induces a sell-off in the equity market, you know there is something seriously wrong.
"On the one hand, it seems mad to withdraw such support while the economy continues to be so weak; on the other hand, one wonders whether the economy will ever look strong enough to do without it."
We saw this in 2001-2005. "We can't raise interest rates yet! The economy's too weak!" And by the time it looked strong enough that the Fed felt safe in raising interest rates, it was too late - a giant bubble was forming.
Sorry, but I don't see many similarities between then and now. What asset bubble, for instance, are you currently afraid of? Gold? Treasuries? And 01-05 was not burdened by massive debt, unemployment, or any inability to obtain or employ credit. And Alan Greenspan accommodated for too long because he thought inflation was the only iceberg on the ocean, and he hadn't seen it for years.
I certainly agree that recovery A shouldn't create crash B, and that Mr. Greenspan should take some blame for making that very mistake. But it sounds like you think we should raise interest rates now. I think that's batty. It sounds like you are afraid of getting out of this hole for fear of falling in another. That's not how I'd run an economy, or a life.
I always thought the Goldilocks Story could stand to be modernized and sexed up a bit.
There is Bad.....and there is Very, Very, Naughty.
Mr. Hartnett doesn't understand that we are in the "silly season" until the first Tuesday in November.
The Fed will stand pat - unless something drastic occurs - until then, or unless they want to be a punching bag.
Regards
In this blog, our Buttonwood columnist grapples with the ever-changing financial markets and the motley crew who earn their living by attempting to master them. The blog is named after the 1792 agreement that regulated the informal brokerage conducted under a buttonwood tree on Wall Street.
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