Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
Stocks posted gains again last week, propelled by reassuring words from Federal Reserve Chairman Ben Bernanke. The yield on the 10-year Treasury dropped while stocks rose to new highs, with the biggest gains coming from smaller-cap names.
Just as stock investors started coming to terms with the idea of tapering, Bernanke made some statements last week that sounded very dovish, suggesting it would take longer for tapering to begin than many market observers might expect. Specifically, he said, “both sides of our mandate are saying we need to be more accommodative.”
Bernanke's comments made me think of a country-western song by Dan Hicks entitled “How Can I Miss You If You Won't Go Away?” It's hard to think about life without quantitative easing when it seems likely to hang around in its entirety a lot longer than a few months.
But Bernanke's perspective does not necessarily reflect the mood of the entire FOMC. Notes from its mid-June meeting, released last week, show an equal split between those in favor of tapering in the near term and those opposed to it. We anticipate an end to the unwinding of QE by mid-2014, and we believe investors should continue to brace for it given the improvement we've seen in the US economy.
In many ways, central bankers are playing the role of a doctor nursing a sick patient back to good health. Part of that role is determining the right amount of medicine to administer to aid in the patient's recovery—and when to lower the dosage. But different patients require different doses. For example, the euro zone is in need of more critical care. With unemployment at more than 12% and an easy-money policy that has been counteracted by austerity policies in many nations, there continues to be a need for an extreme form of financial repression.
And it's not just Mario Draghi, president of the European Central Bank, saying it. Mark Carney, head of the Bank of England, has echoed this sentiment in recent weeks too. ECB Vice President Vitor Constancio explained it simply: "Europe is behind the US in economic recovery and inflation risks, which implies that monetary policy has to stay accommodative for a longer period of time."
Japan is in an entirely different hospital ward. To treat an economy that has been ailing for decades, it has received a bigger dose of financial repression through Abenomics. Following an encouraging Tankan report, an economic survey of Japanese businesses, and other positive signs, the Bank of Japan appears more confident that the country's economic recovery is underway.
Meanwhile, China, which had previously avoided medical treatment, may need to see a doctor. China just reported that its second-quarter gross domestic product expanded 7.5% from the year earlier, slower than its 7.7% growth rate in the first quarter. China's slowing economy has led to talk of whether its central bank should intervene and encourage the yuan to depreciate in order to support its struggling export sector.
Investors need to recognize that financial repression is a medicine widely prescribed to cure economic ills. While the dosage can be adjusted depending on a specific economy's symptoms, it's a treatment that's likely to be prescribed for the long term.
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