The Power of Governments to Support Financial Markets

The views expressed by Izabella Kaminska in this FT Alphaville commentary go a long way in explaining why asset markets (with the notable exception of safe havens) seem to be unstoppable these days.

Consider, for example, the views professed by Duquesne Capital Founder, Stanley Druckenmiller, in a recent Bloomberg interview. Not only did he outline that equity was anything but cheap, he claimed the current course of equity markets was heading towards another equity bubble — so anything but a safe haven — one whose origins could be traced back all the way to the Dotcom era. That, he warned, ended badly, and so undoubtedly will this.

To support his view, Druckenmiller added that he had already successfully predicted the subprime bubble. He never made the view public at the time because he had been burned once before when making views of this sort known. This time he wasn’t going to make the same mistake again. Hence his current public declaration that a storm, much bigger than the one that hit in 2008, is coming. Ye all be warned.

But here’s the thing. While I agree with a lot of the points that Druckenmiller makes — I too, for example, believe the current crisis can be traced all the way back to Dotcom, and that the demand for government bonds won’t go away all that easily — I don’t think his assessment will necessarily be correct this time around.

Something very important has changed, which makes this a very different type of bubble.

The government will continue to support the market no matter what.

There is much more to this and reading it in its entirely for additional context is highly recommended.

What’s important about this is that there is a growing belief - shared by Kaminska above - that governments and central banks have unlimited power to support markets. Too few people these days seem to be asking the question, “Who bails out the governments and the central banks if things go awry?”

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2 Responses to The Power of Governments to Support Financial Markets

  1. But What Do I Know? March 7, 2013 at 1:11 PM #

    Or I suppose you could ask it another way-what happens when TPTB decide that they want prices to drop (because that’s how you really make money, not in perpetual creep-up markets). A nice 20% correction would just mean 20% more profit if the central banks pulled away and then returned. . .

    The author has a different view of the central bankers’ motivations than I do-I’ve been wrong before; we’ll see who is right this time.

  2. News March 7, 2013 at 1:57 PM #

    My prediction is that before we have a really serious crisis, we might have a 15% correction in the stock market that bring 10 year treasuries to 1-1.25. At that point interest rates will not be able to go lower.

    I would say there is a 75% chance of above prediction actually occurring this year, probably in late summary early fall.

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