Markets Abhor a Candid Central Banker

Everything was going according to plan, with the MSCI All-Country World Index of global equities rallying as the European Central Bank signaled that it was setting the stage for an interest-rate cut in September. But then Mario Draghi started speaking, saying at the outset of his press conference that the outlook was “getting worse and worse.” Equities quickly went from their highs of the day to having one of their worst days of the month.

The comments we’re so much a surprise as they were a shock. Everyone knows that the outlook for Europe’s economy is bleak, but nobody wants the person in charge of the world’s second-largest economy to seemingly admit defeat. The comments laid bare that not even years of zero interest rate policies by major central banks nor trillions of dollars spent on bonds and other financial assets can get the global economy to reach escape velocity. And the only answer central bankers have is to double down on failing policies. Sure, the global economy might be in much worse shape if central banks hadn’t taken the extraordinary measures that they had following the financial crisis. It’s clear, though, that they need to come up with other ideas to spur growth because more easing will be something like pushing on a string. “A perpetual state of easing is no longer easing because it doesn’t incentivize consumers and businesses to act today instead of tomorrow. They’ll just wait until tomorrow,” Bleakley Financial Group chief investment officer Peter Boockvar wrote in a note to clients. “Thus, it’s not stimulus anywhere because nothing gets stimulated outside of asset prices.”