'Don’t Fight the Fed' Has Worked for 20 Years: Analyst
"Money Never Sleeps" was the title of the sequel to Oliver Stone’s "Wall Street" and the phrase has never been so relevant according to Philippe Gijsels, the Head of Research at BNP Paribas Fortis Global Market in Brussels.
“Markets have to deal with sources of worries across multiple time zones,” said Gijsels in an interview with CNBC.com on Thursday, reminding that President Barack Obama walked out of a meeting with Congressional leaders about raising the debt limit.
While Gijsels believes the talks will end in a deal, he said the brinkmanship adds to the list of worries facing investors across the world.
The “discussion and the possibility that it could lead to a downgrade of the US debt adds yet another line to the already long list of uncertainties that is making this summer volatile and nervous,” he said.
“The jobs report out of the US was a disappointment across the board, which once again demonstrated that the US recovery remains on shaky grounds.”
China is also a cause for worry according to Gijsels despite this week’s forecast-beating second quarter growth data.
A lot of questions about China remain, despite the good recent figures as export growth is slowing down, he said.
“Investments continue to take up a disproportionally large part of the Chinese economy. In the meantime everybody tries to make sense of the developments in China's housing market. And for good reason, as few other subjects are so confusing, with so many different and opposing views,” Gijsels said.
Soft Landing for China?
“A soft landing is the most common scenario. However, until the Chinese plane has safely hit the ground, the fear of a crash will continue to spook markets,” he warned.
With two major problems in two time zones without counting the euro zone, Gijsels is beginning to see similarities with the last summer.
“Remember that in August last year, the world economy was slowing, there was a lot of talk about recession, a Japan-like lost decade, deflation and a Fed with not too much ammunition left to stimulate the economy,” he said.
“However, at that time Ben Bernanke and his disciples started talking QE2 , which was actually implemented a couple of months later. Inflation expectations rose, money moved into more risky assets in a rarely seen 'risk-on' move and the rest is history,” Gijsels added.
The current situation looked in Gijsel’s view worse than in 2010 as Bernanke had indicated the bar for implementing the third round of quantitative easing would be far higher than with QE2.
“Yesterday, however, it became clear that this bar may not be as high as he made us to believe," he said.
"The Bernanke Put, that we have lived without for a couple of months, not surprisingly negative months for risky assets, seems to be gradually but certainly put in place. The implications for markets can hardly be overestimated.”
“The famous saying 'do not fight the Fed' has worked for the last 20-odd years. Still, it is clear that it is not a healthy situation that each time when the printing presses stop, trouble starts and the Fed has to turn them on again,” he said.
“Will the ultimate price to pay be a loss of credibility in the Fed and/or run-away inflation? The jury is still out,” Gijsels added.