Who Wins in an Artificially Monetized World?

Who Wins in an Artificially Monetized WorldIf there is going to be genuine economic growth in mature economies, the leadership will have to come from the U.S. economy.

The convulsions taking place in the Japanese capital markets are emblematic of the monetary exuberance that both captivates investor sentiment and distorts its reality.

It’s a trader’s paradise with such volatility, based not on Main Street fundamentals, but on the ability and willingness of policymakers to puppeteer capital markets.

While liquidity and certainty are hugely important to investor sentiment, all the financial engineering should soon produce its own blowback. Investment risk in capital markets remains high.


Investor sentiment among institutional investors in U.S. equities still has strength to carry this market higher if corporations perform.

Corporate earnings are managed, but that’s how the system works. There’s been a paring down of earnings estimates for the second quarter.

E. I. du Pont de Nemours and Company (NYSE/DD), or simply DuPont, reduced its expectations for its first half of operating profits due to the weather (the wettest spring in almost 120 years in the farmbelt states). The company said full-year earnings per share will be at the low end of its forecast, between $3.85 and $4.05. Agriculture is the company’s most important operating division. (See “Why DuPont’s Earnings Results Are So Typical for This Stock Market.”)

Capital markets, especially the equity market, are looking for catalysts. From what I read, there are still great expectations for the Japanese equity market. Unscientific investor sentiment among fund managers maintains an outlook of perpetual volatility in that market.

Getting back to the U.S. market, economic news is not robust, but there is a positive disposition to the data. Last week’s retail sales growth number was good and lower-than-expected initial claims for jobless benefits also surprised, turning investor sentiment around.

Economic data are helping investor sentiment at a time when it needs it—the lull between earnings seasons. Capital markets will still convulse in this overly monetized world, but volatility in bonds and currencies should diminish as we get into corporate earnings.

Along with many equity market participants, I have low expectations for the second quarter. I think the earnings results will mimic the economic news demonstrated throughout the quarter. There was a real mixed basket of performance with no one statistic galvanizing investor sentiment.

The great monetary experiment that’s unfolded has definitely left a profound hesitation in capital markets. While outlooks always change, there is a lack of conviction on the part of Wall Street analysts and economists as to how things are going to unfold.

Predictions about the equity market were way off. Predictions about oil prices and the U.S. dollar were off the mark, too.

The profound intervention in capital markets by central banks around the world has left a vacuum of indecisiveness and fragility. Investor sentiment has no conviction.

The only certainty is the collective bewilderment of what happens when all this monetary stimulus is withdrawn.

The Federal Reserve is going to surprise capital markets sometime soon with a reduction in quantitative easing. While I recognize what central banks have done in terms of providing liquidity and stabilizing investor sentiment since the stock market crash, it’s time to get central banks out of their turbocharged monetary easing modes.

Capital markets have been cavitating recently, butting heads against monetary forces that are clearly untenable. While it will be a rocky road (and lucrative for traders and hedge funds), it’s time to let capital markets chart their own paths.