EDITORIAL NOTE: We’re right now plying the azure waters off Richard Branson’s Necker Island. The following edition of the Market Structure Map ran May 29, 2013, ahead of last year’s NIRI National Conference (if you’re heading to NIRI in Las Vegas this year, don’t miss my fireside chat about Flash Boys and Broken Markets with famed HFT expert and frequent CNBC guest Joe Saluzzi of Themis Trading. More on that next week!). The Fed continues to be de facto captain of risk assets and the wind beneath their wings. It behooves us all in the IR profession to realize we’re in the process of undergoing separation anxiety. It just hasn’t manifested yet.
“If something cannot go on forever, it will stop.”
This witty dictum by Herb Stein, father of Ben Stein (yes, from Ferris Bueller’s Day Off, The Wonder Years, Win Ben Stein’s Money and TV in general), is called Stein’s Law. It elucidates why stocks and dollars have had such a cantankerous relationship since 2008.
Last Wednesday, May 22, Ben Bernanke told Congress that the Federal Reserve might consider “tapering” its monetary intervention called quantitative easing (QE) “sometime in the next several meetings.” You’d think someone had yelled fire in a crowded theater. The Nikkei, Japan’s 225-component equity index, plunged 7%, equal to a similar drop for the Dow Jones Industrial Average at current levels. On US markets, stocks reversed large gains and swooned.
Why do stocks sometimes react violently to “monetary policy,” what the heck is “monetary policy,” and why should IROs care?
Let’s take them in reverse order. Investor-relations professionals today must care about monetary policy because it’s the single largest factor – greater than your financial results – determining the value of your shares.
By definition, “monetary policy” is the pursuit of broad economic objectives by regulating the supply of currency and its cost, and generally driven by national central banks like the Federal Reserve in the United States.
Stay with me here. We’ll get soon to why equities can throw tantrums. (more…)