Why Markets Have Gotten So Jumpy

If you're wondering what happened to the steady bull market, a drought metaphor can help explain. New Mexico ranchers are dealing with a severe drought this week, above.

To understand why global financial markets have been so volatile the last few weeks, imagine a town full of farmers who have been living through a decade-long drought.

The first few years of the drought, they probably adapted by shifting to crops that could grow without much water, but at the same time they probably kept renewing their flood insurance. After all, the drought could end at any time, and losses caused by too much water are every bit as painful as those caused by too little.

But after years and years of writing checks for flood insurance, our farmers might get a little tired of throwing money away to protect against a risk that never seems to materialize. By the seventh or eighth year of the drought, they might just say “forget it” and let flood insurance lapse.

Then, with the 10-year mark approaching, it rains. Not very hard: Imagine a perfectly normal rainstorm by pre-drought standards, not enough to cause a flood, but enough to make the farmers think flooding just might be a possibility again.

What would the farmers do? There’s a good chance that they would call their insurance broker and very quickly, even desperately, sign up for flood insurance once again.

And that helps explain why the markets have been so topsy-turvy of late.

Rain, in this metaphor, is inflation — and the decade-long drought is the near-decade that global inflation and interest rates have been persistently low.

In the last few months, there have been the earliest stirrings that this situation could — emphasis on could — be on track to change. A tax bill was passed in December that is expected to act as an economic stimulus in the short run. The January employment report reflected fairly strong growth in average hourly earnings. The Consumer Price Index came in a little higher than forecasters had been expecting.

When you pick apart the shifts in the financial markets, they are consistent with the idea that investors are not yet betting on an inflationary flood but are opening their minds to the idea that it could happen.

For example, by comparing the prices of regular Treasury bonds with inflation-protected bonds, you can get a sense of how worried investors are about inflation. On Dec. 1, those prices were such that an investor would break even if from five to 10 years in the future — December 2022 through December 2027 — consumer prices rose 1.78 percent a year.

That has now risen to 2.21 percent, which is quite a large swing by the standards of the generally staid bond market.

Here’s an important wrinkle: While economists often talk about those numbers as a measure of investors’ inflation expectations, they can just as easily be a measure of investors’ level of worry about inflation risk. What’s the difference? One is about what seems likely to happen, while the other is about an increase in the chances of an unlikely —but costly — outcome.

Back to the drought metaphor: The farmers might still think that another dry year is the most likely result, but if recent showers make them worry more about the risk of flooding, and theyall try to buy insurance at the same time, this drives up the price. That seems to be what has happened in the last two months in the market for inflation-protected bonds, which essentially function as insurance against future rises in prices.

This framework also helps explain why there have been such big swings in financial markets lately.

Analysts at Deutsche Asset Management noted recently that government bonds from the United States and Germany — generally considered some of the world’s bedrock safe assets — have been more volatile lately than bonds issued by emerging market countries like Indonesia and Mexico.

And the Standard & Poor’s 500 has moved more than 1 percent on eight of 16 trading days in February thus far, which doesn’t make much sense if you’re looking for fundamentals-based reasons for such big moves in stock prices. It makes more sense if you believe that investors are trying to extrapolate from tiny fragments of information the potential risk of a radically different economic and financial market environment in the years ahead.

The swings in stock prices appear to be intimately linked to movement in long-term interest rates, which in turn hinges on those expectations of inflation and how the Federal Reserve will respond if inflation does rise.

On Wednesday, for example, the stock market had been on track for a sharply positive day until the Fed released minutes of its last policy meeting at 2 p.m. Soon after, the stock market plunged and bond yields rose, as investors evidently concluded that the Fed was inclined toward a somewhat faster rate of interest rate increases than had been assumed.

But you can also interpret swings like that one as a result of investors trying to draw big conclusions about the economic future from incremental pieces of information.

In December, Fed officials projected that the main interest rate the central bank targets would be 2.8 percent in the longer run. But when it first started publishing its consensus of that number, in June 2015, it was 3.8 percent. If the economy evolves in a direction that causes the earlier estimate to prove more accurate, it implies that a wide range of assets are priced incorrectly (in particular, it would mean that prices for long-term bonds should be a lot lower and their yields higher).

So as long as this pattern continues, you can interpret every day’s economic news and market swings as a referendum on which state of the world is more likely. Are we still in the world of 2009 to 2017, in which inflation and interest rates stayed low and asset prices continued their steady rise? Or are we returning to the pre-2008 levels of each, a possibility that is perhaps less probable but would be hugely consequential if it happens?

If that world does arrive, the people who re-upped their flood insurance at the first sign of rain will be glad they did.

In Other News

fake money

Keywords clouds text link 

Dịch vụ seo, Dịch vụ seo nhanh , Thiết kế website ,  máy sấy   thịt bò mỹ  thành lập doanh nghiệp
Visunhomegương trang trí  nội thất  cửa kính cường lực  Vinhomes Grand Park  lắp camera Song Phát thiết kế nhà thegioinhaxuong.net/

Our PBN System:  thiết kế nhà xưởng thiết kế nội thất thiết kế nhà tem chống giả

aviatorsgame.com ban nhạcconfirmationbiased.com 
radiantcitymovie.comeatatdistrict.com
chaletedelweiss.useve-razor.com
occastudios.commoscasenlasopa.net
skaratoken.comshowdx.com
thelettersmovie.comheritage-gifts.com
singstreetmovie.comdeadaccountsonbroadway.com
moscasenlasopa.netratchasima.net
eatatdistrict.comthe-movie-trailer.com 
theboroughraleigh.comradio-electronics.co
mariankihogo.com  ốp lưngGiường ngủ triệu gia  Ku bet ku casino

https://maysayhaitan.com/  https://dovevn.com/ buy fake money https://sgnexpress.vn/ máy sấy buồn sấy lạnh

mặt nạ  mặt nạ ngủ  Mặt nạ môi mặt nạ bùn mặt nạ kem mặt nạ bột mặt nạ tẩy tế bào chết  mặt nạ đất sét mặt nạ giấy mặt nạ dưỡng mặt nạ đắp mặt  mặt nạ trị mụn
mặt nạ tế bào gốc mặt nạ trị nám tem chống giả

https://galaxymedia.vn/  công ty tổ chức sự kiện tổ chức sự kiện
Ku bet ku casino
Sâm tươi hàn quốc trần thạch cao trần thạch cao đẹp

suất ăn công nghiệpcung cấp suất ăn công nghiệp

https://docs-cashshop.com/
https://galaxymedia.vn/dich-vu-to-chuc-su-kien-la-gi-quy-trinh-to-chuc-su-kien-nhu-the-nao-id3108.html

© 2020 US News. All Rights Reserved.