WHAT THE LOSS OF CONFIDENCE COULD MEAN FOR U.S. MARKETS

ppteam

After digesting various rumors about the potential response to the EZ crisis, I made an off the cuff comment that we’re to the point where investors have more confidence in blogs such as Zero Hedge than central banks and government leaders.  What ensued was a lively and interesting bunch of comments regarding this observation.  Among them:

One commented, “..20 years of central banks and governments lying to people, regulators becoming facilitators, and NO accountability.”  Another: “The real question is whether this is reversible…As it is now, bias and intellectual lethargy just exacerbate the divisiveness and economic myth-making.”

The purpose of this post is NOT to debate who/what is largely to blame, as that topic has been exhausted and will be debatable for decades on end.  Rather, what are the implications of this loss in confidence?  Is it more than just investors being unhappy with central banks & government?  Or are there real economic implications to this loss of confidence?

I believe what is transpiring right now is actually an implicit form of reverse financial liberalization.  Obviously troublesome is that outside the explicit incremental regulation imposed on the markets (which is arguably a different subject), you cannot reasonably quantify this loss of confidence.

In the National Bureau of Economic Research’s working paper by Bekaert, Harvey, and Lundblad, the researchers show that equity market liberalization leads to a one percent increase in a country’s annual growth rate over a five-year period.

Even putting growth aside, a strong argument could be made that the equity market could deserve a P/E market contraction due to this current environment of governmental/policy uncertainty.  It is widely known that emerging market economies trade at a lower multiple partially attributed to lack of openness, mistrust, etc… Should investors expect to see a gradual repricing due to this mistrust?  Could it even impact growth?