Rally Masks Real Fears - Investors Express Little Confidence in Policy Makers to Tackle Real Problems
From The Wall Street Journal:
While the credibility of policy makers has historically been a concern for emerging-markets investors, it is unusual for political fears to play such a big role in market sentiment in the world's largest economies.
Yet the erosion in confidence in the ability of political and monetary authorities to handle the challenges posed by U.S. and European economies saddled with massive loads of debt has been at the root of the market's latest bout of turmoil.
On one side of the ledger, investors express frustration with the perceived unwillingness among government officials on both continents to make necessary choices that would be unpopular in the short-term with voters.
In the U.S., the flashpoint among investors was the political acrimony over raising the debt ceiling. As the clock ticked down toward a possible default, investors voiced disbelief that not only had the fight dragged on but that it was resulting in a budget reduction plan that fell far short of the "Grand Bargain" that had seemed within reach just a week before.
The disappointment at the debt-ceiling deal was amplified by last week's decision by Standard & Poor's to strip the U.S. of its triple-A credit rating for the first time ever.
In Europe, the frustration has been building for months, spreading from the continent's periphery to the core economies of Spain and Italy.
A challenge as big as the European debt crisis "requires leadership and coordination and we just haven't gotten that," says Michael Story, a London-based economist at Western Asset Management.
The second loss of confidence is in the ability of central banks to do much more to shelter investors, businesses and consumers from the pain of massive overhangs of debt.
Aside from the debt ceiling fight, the issues driving the recent loss of confidence have been swirling since even before the 2008 financial crisis.
In 2008, governments and central bankers were able to step in to provide liquidity and shore up confidence, albeit with missteps along the way. This time around, investors sense there is no quick fix.
"We've gone through the denial phase and we've been seeing some of the anger phase but we're not quite in the acceptance phase," says Stephen Cucchiaro, chief investment officer at Boston based Windhaven Investment Management, which manages $6.6 billion.
Mr. Cucchiaro says he views the current crisis as an opportunity for elected officials to deal with structural fiscal problems in the U.S. when it comes to both entitlements and the tax code. "Both sides need to come together," he says. "But no-one is doing that."
While the credibility of policy makers has historically been a concern for emerging-markets investors, it is unusual for political fears to play such a big role in market sentiment in the world's largest economies.
Yet the erosion in confidence in the ability of political and monetary authorities to handle the challenges posed by U.S. and European economies saddled with massive loads of debt has been at the root of the market's latest bout of turmoil.
On one side of the ledger, investors express frustration with the perceived unwillingness among government officials on both continents to make necessary choices that would be unpopular in the short-term with voters.
In the U.S., the flashpoint among investors was the political acrimony over raising the debt ceiling. As the clock ticked down toward a possible default, investors voiced disbelief that not only had the fight dragged on but that it was resulting in a budget reduction plan that fell far short of the "Grand Bargain" that had seemed within reach just a week before.
The disappointment at the debt-ceiling deal was amplified by last week's decision by Standard & Poor's to strip the U.S. of its triple-A credit rating for the first time ever.
In Europe, the frustration has been building for months, spreading from the continent's periphery to the core economies of Spain and Italy.
A challenge as big as the European debt crisis "requires leadership and coordination and we just haven't gotten that," says Michael Story, a London-based economist at Western Asset Management.
The second loss of confidence is in the ability of central banks to do much more to shelter investors, businesses and consumers from the pain of massive overhangs of debt.
Aside from the debt ceiling fight, the issues driving the recent loss of confidence have been swirling since even before the 2008 financial crisis.
In 2008, governments and central bankers were able to step in to provide liquidity and shore up confidence, albeit with missteps along the way. This time around, investors sense there is no quick fix.
"We've gone through the denial phase and we've been seeing some of the anger phase but we're not quite in the acceptance phase," says Stephen Cucchiaro, chief investment officer at Boston based Windhaven Investment Management, which manages $6.6 billion.
Mr. Cucchiaro says he views the current crisis as an opportunity for elected officials to deal with structural fiscal problems in the U.S. when it comes to both entitlements and the tax code. "Both sides need to come together," he says. "But no-one is doing that."
posted by Sid Cottingham | 5:35 AM
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