"It’s morning again in America."
And in case you’re wondering, T.S. Eliot did not speak or write that quote.
Neither did Mario Draghi.
Ronald Reagan uttered those words as a metaphor to suggest America faced an opportunity to be great again.
I wonder: What did he mean by "again?"
Did Reagan mean to imply it was still morning in America, as if up until then we hadn’t been able to get our country up and moving yet?
Or did he mean it was finally morning again, as if we’d long been awaiting an opportunity to start anew … perhaps as we had when America was founded, for instance?
Does it make a difference?
Because if Reagan meant to imply still or finally, then maybe European Central Bank President Mario Draghi is channeling his inner Reagan when he tells the world that "interest rates must be low today so they can be higher tomorrow."
He said as much last Thursday after the ECB monetary policy announcement.
For what has been and what might have been point us here.
But here is a world of speculation, where we do not know what Draghi means when he says "tomorrow" … much less "today."
Until it’s tomorrow again in Europe, we can think only of the path we took and did not take that got us to today.
You with me?
Draghi says tomorrow will not come until March 2017 at least, when the ECB bond purchases might cease.
That is, of course, if they don’t deem it "necessary" to start buying equities before that.
For if we think of what might be if the ECB buys up equities like the Bank of Japan is doing, we entertain a perpetual possibility again. Only this time we wonder if disturbing the dust on a bowl of rose leaves reveals a bad idea.
Time present and time past
Are both perhaps present in time future
And time future contained in time past.
If all time is eternally present
All time is unredeemable.
What might have been is an abstraction
Remaining a perpetual possibility
Only in a world of speculation.
What might have been and what has been
Point to one end, which is always present.
Footfalls echo in the memory
Down the passage which we did not take
Towards the door we never opened
Into the rose-garden. My words echo
Thus, in your mind.
But to what purpose
Disturbing the dust on a bowl of rose-leaves
I do not know.
— An excerpt from Quartet I, Burnt Norton,
Because surely the whole point of continuing quantitative easing, monetary accommodation, bond-buying or even equity purchases is not alone going to generate economic activity and mend economies.
No, it is the perceptions of economic and financial market participants that will spur the action needed to produce growth.
Perceptions indeed. The ebb and flow of consumer and investor confidence — as manifested in increased consumption and increased asset prices — has been the best barometer of central bank efficacy.
What happens if that barometer breaks?
Indeed, there is a growing divide between the signals we can glean from investors relative to consumers, and asset prices relative to economic activity. Main Street isn’t exactly conveying the same sense of confidence in policymakers as Wall Street.
So what happens when the ECB starts buying equities?
Will it send a signal of confidence? Or desperation?
Would not the European Central Bank — or all central banks, for that matter — be speculating on its ability to restore the confidence of the public with equity buys?
Extraordinary monetary policy quickly exhausted its influence on economic growth. It is now on the verge of exhausting its influence on public perception.
Here I want to steal two excerpts from recent commentary by socionomist Peter Atwater:
Mood precedes action, rather than lags it. We act as we feel, driven by our level of confidence. With high confidence, we see permanence to our financial condition — expecting it to continue long into the future. …
The more — and more openly — central banks act to simultaneously boost financial asset prices and to press savings rates lower, the more voters have good reason to question the motives of the Federal Reserve, ECB and other central banks.
In essence, the divide between Main Street and Wall Street is growing. And Main Street is the player that chooses when the music stops.
Because despite the climb in share prices in the U.S., for example, the underlying companies aren’t experiencing the same enthusiasm in their businesses.
Earnings continue to deteriorate as stock prices rise.
Corporate profits aren’t looking so good.
Does doing more for the Wall Street piece of the confidence equation not risk the Main Street piece?
To Atwater once more:
If central banks aren’t careful, the lack of a corporate "wealth effect" — if not outright stock-price-driven investment reductions — won’t just limit the positive impact of stock purchases, it will eliminate it entirely: Rather than stock prices naturally reflecting reality, our economic reality will be slashed and burned until profits support central bank-distorted stock prices.
So maybe central banks can’t even boost the Wall Street piece with equity purchases even if they tried???
Might want to leave the dust on those rose leaves. But what’s the point?
Central banks have no choice but to dither in abstraction. We must react to whatever that brings. And as I think about the ebbs and flow of central bank influence today, I think emerging-market assets are a good indication.
Emerging market bonds have been on a tear.
Emerging market stocks have, too.
It just looks like that fun could come to an end soon. (I first brought that idea to your attention Aug. 22.)
Today, we are closer to where emerging markets could lose support of the central bank narrative. And selling in that space could create a feedback loop of pressure that undermines confidence across global asset markets.
Be ready to secure gains or capitalize on downside when "tomorrow" comes.