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Rigged casino

25 September 2013 By Ian Campbell

Global markets are now an especially dangerous game. Call it Fed roulette. The U.S. Federal Reserve under Ben Bernanke promised clarity, forward guidance, a smooth exit policy. Forget it. The Fed couldn’t even guide markets to what it would do in September – let alone in 2015. Its decision last week was as unexpected as a spin of a roulette wheel. And the problems don’t stop there.

Fed decisions, of course, have always been unpredictable. And “don’t fight the Fed” has always been a market mantra. But Bernanke and other central bankers have promised something different, a radical change from the “we never pre-commit” of Jean-Claude Trichet, former president of the European Central Bank. Trichet’s promises of policy uncertainty were, however, entirely honest. Bernanke’s promises of policy predictability aren’t. They can’t be kept.

Nor are false promises the only problem. There are also false markets.

Global markets are made of players who must buy or borrow their chips. Their decisions have serious consequences. But the Fed and other central banks are printing their own chips in abundance and playing with them. Their aim is to move markets. They distort the prices for all other players at the global roulette table.

How those distortions play out when the Fed and others stop printing is now the greatest uncertainty facing markets and the global economy. The danger is that many assets are seriously overvalued. Bubbles, in other words. The damage being done by the printed chips is hard to gauge, even by the central banks’ forward guides themselves. And that creates still more uncertainty about future policy.

For medium term investors all this is terrible. The market is rigged and even more hazardous than usual. But Fed roulette volatility suits speculators, the sort of players central banks shouldn’t be serving.

The forward guidance promises of predictable policy, though discredited already, probably won’t go out of fashion for a while. But it’s time now for the Fed and others to pull their printed chips out of markets. Then real investors can at least begin to play a more honest, risky game. 


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