Markets around the world panicked in May when Fed Chairman Ben Bernanke hinted that the Fed could begin dialing back QE stimulus as early as at its June meeting. Oh no! That June meeting was only a month away. The FT World ex-U.S. Index plunged 13% over the next four weeks. The MSCI Emerging Markets Index (19 countries) plunged 14%. Even the S&P 500 in the U.S. declined 6% to the June 22 low.
At that point Chairman Bernanke also seemed to panic, rushing out with his assurances that he didn't mean the Fed would taper back stimulus that soon, just that it could, but that it probably would not until later in the year.
With those assuring words, the U.S. market rallied back not only to its May peak, but with the S&P 500 rallying to a new high 2% above that peak.
However, here we are in August with the Fed now expected to begin tapering at its September meeting, and if not, for sure in October. But are investors again saying oh no, September is only a month away?
So far, not in the U.S. anyway.
However, the FT World ex-U.S. Index did not rally back as much as the U.S. market on Bernanke's assurances in June, and rolled over to the downside again a week ago, now 5% below its May peak, while the MSCI Emerging Markets Index's rally off Bernanke's June assurances failed two weeks ago when tapering talk resumed, and it is now 12% below its May peak.
So the disconnect between the enthusiasm and confidence of U.S. investors and those elsewhere in the world continues.
Global markets seem to expect the withdrawal from their addiction to massive amounts of U.S. stimulus will be difficult, while Wall Street is assuring U.S. investors that it won't be a problem. After all, the Fed will still be providing stimulus. It will only be tapering back on the amount it provides, maybe from the current $85 billion a month to $65 billion, then $50 billion, $40 billion, not planning to be back to zero stimulus until sometime in 2014.
Here's the problem.
The massive amounts of fiscal and monetary stimulus in 2008 and 2009 worked to prevent the 'great recession' from worsening into another great depression. But increasing amounts have been needed since just to keep the economy's head barely above water. QE1 was followed by QE2's $30 billion of monthly stimulus, which was followed by QE3's $40 billion, which was followed by 'QE to infinity' in December of last year, in which the stimulus was raised to $85 billion monthly.
Even with that the U.S. economy has been stumbling, global markets even more so, quite a number back in recessions. The massive stimulus efforts by global central banks clearly did not provide a permanent cure, and more problematic, just maintaining the status quo has required increased dosages.
It's like a patient with a serious medical condition being prescribed oxycodone to relieve the pain while a series of time-consuming procedures are undertaken to fix the condition. If the procedures don't work the patient will wake up with the condition not being cured plus an addiction to oxycodone, withdrawal from which brings its own problems.
That seems to be the situation with global economic problems. It has required increasing dosages of stimulus to keep the pain only somewhat at bay. And now other problems like record government debt require that the dosages be tapered back, even as the patient is unable to manage without increasing dosages. Withdrawal pains will be unavoidable.
For now anyway, U.S. investors seem to have very short memories. They don't seem to remember why the previous possibility of tapering scared them in May, while global markets not only remember that, but also remember the terrible long-term record central banks have in trying to bring economies in for soft landings.
Congress has already begun withdrawing fiscal stimulus, cutting back on government spending and raising taxes this year. The thought of the Fed also tapering back the monetary stimulus the economy has so clearly needed more of, not less, is not a promising situation.