E Market Briefing For Monday, Sept. 11

Capital market bubbles superficially seem relieved by the series of great challenges, tragedies, and natural disasters swirling around but this may be a sort of temporary palliative. Clearly as the measure of Hurricane Irma gets a bit clearer, there should be little doubt that, besides being a ‘budget buster’ of course, it also portends stresses on discretionary spending, but a ‘boom’ of immeasurable proportions coming during the long reconstruction phase. 

The ‘bond bubble’ ultimately gets impacted by this. To markets that means a lot more than the latest North Korean nuclear test or a missile launch, unless of course they actually attack while they think the US is focused entirely on rescuing our fellow citizens. When people hear TV reporters in Florida warn that the wind and surge will bring Atlantic sharks into the city as well as blowing alligators from the Everglades into metro areas; that puts an historic light on what the fight and flight to get through this is all about. 

Overall, however, we do see signs of bubbles in more and more parts of the capital market where monetary policies would suggest these reverse soon but it’s not happening (and the disasters are part of the influence). Just as a for instance, here in Europe, the interest-rate policy has been largely responsible for a decline in earnings at European banks.

The Federal Reserve and the ECB announced that they intend to gradually bring loose monetary policies to an end, although Mr. Draghi’s equivocation a couple of days ago is what firmed the Euro to even higher levels. He argued for no rate changes or continued stimulus in the face of a stronger European economic growth. That means he, much like Bernanke and Yellen did in the US, will put the ECB behind a yield curve ultimately. Additionally, these low rates (especially in the US) suppressed activity which now is overshadowed by the massive projects of reconstruction, which will stimulate anyway ‘as if’ the monetary policies had low rates achieve what ordinarily they would.