Transmission Problems

The recent melt up in global equity markets, courtesy of global Central Banks, has shown the limitations of Central Banks in a de-leveraging post credit bubble economy. Traditionally, Central Bank policy was relatively effective in a normal recovery with slight adjustments in the discount rate and fed funds rate adequate enough to tweak growth at the margin.  However, as this recovery has been anything but normal, Central Bank policy can hardly be characterized as normal with policy tools moving way off the reservation. The continued promise to do more of the same, seems to have empowered those under-invested in equities to suddenly cast off their concerns (4 years into the meagre recovery) and take part in the “great rotation”. While it is difficult to be critical of those that are unhappy with a 180 basis point ten year note yield, it is interesting to see the underpinning for this sudden change of heart. A quick review of what sectors have outperformed during this most recent equity run reveals a great deal about what investors feel regarding the efficacy of Fed policy.  Consumer staples, utilities and healthcare have outperformed while materials and deep cyclicals have woefully underperformed. What this says to us is that investors know that Fed policy cannot affect any lasting change on real economic growth and that belief is evidenced by what they are buying. Investors have shown that they fully understand that there is a breakdown in the transmission of the Fed’s ZIRP into consistently higher levels of real economic growth.  If this were not the case, we would not be seeing such a complete avoidance on the part of investors towards anything tied to sustained real global growth (base metals, deep cyclicals, miners,etc..).