"The time to buy is when there's blood in the streets", Nathan Rothschild (attributed).
Micro or Macro?
Normally stock picking investors are interested in the microeconomics of firms; their earnings power, competitive advantage and so on. These factors will, over lengthy periods, determine whether companies outperform their peers or not. In recent years, though, a curious thing has happened: these self-same investors have become more concerned with macroeconomics; the trends and decision making processes within the overall economy. It appears that investors no longer worry much about the fundamentals of investments or even the wiggly predictions of charts, because they have a much more basic way of assessing the likely trajectory of stocks: political analysis. And the result of this may be that we will have blood running in the streets. Again.
Political Incentives
Of course, politicians always affect markets and stocks. They levy taxes, often seemingly at random, they engage in trade wars, introduce market distorting subsidies, build bridges to nowhere and direct business development, invariably with unfortunate consequences. We usually watch politicians in the hope that they'll do something truly interesting, like fall down a hole or walk into a lamppost or tell the truth, or something. Usually we're disappointed. Given that the average politician's grasp of economics is on a par with a child's understanding of quantum gravity, we shouldn't be too surprised when they behave like any other person who's been incentivised to spend other people's money in order to make sure they personally continue to draw a healthy stipend. Investment bankers, CEOs, politicians … you get the idea. Incentives matter.
However, the past decade or so has seen markets become increasingly politicised. Central banks, led by the Federal Reserve, have acted to prevent economic declines and limit the impact of recessions but this has led to the unintended consequence of markets being continually lifted by a flow of government funds. This started on Alan Greenspan's watch at the Fed: the so-called Greenspan Put, which, whether by design or not, put a floor under market falls at the cost of raising moral hazard. This has had some odd, and extremely sad, consequences as we saw in Moral Hazard, But Thanks For All The Fish. Humans being the fallible creatures that we are, we've responded to this kind of pattern by learning to expect it, and this has been particularly true over…
