The Obama 'Honeymoon'/The King Speaks

When the stock market was tumbling towards the end of November last year, there was concern that the Dow Jones Industrials would break its long term support line stretching back to 1990. After a respite lasting barely two months, we are now in danger of re-testing that support line, as financials continue their long slide. It is tempting to view this simply through the prism of relentless losses being announced by banks. But the underlying cause is a failure of the FOMC to get ahead of the curve, and their continuing prevarication over quantitative easing (QE). As we warned last Wednesday, Mr Bernanke missed a major opportunity when he spoke in London last week. Only the announcement of aggressive and immediate buying of Treasuries can give us any hope of averting a significant unravelling of the 1990’s bull market.

Prevarication is the correct label for the Bank of England too. Mervyn King’s elaboration of QE last night contained a number of critical misapprehensions, and there was no sense of urgency either. With stock markets threatening to lurch down, it is not good enough to suggest that “at some point, the MPC might wish to adopt these unconventional measures as an instrument of policy”. Unemployment is accelerating upwards and corporate borrowing costs remain close to record highs. The BoE should be buying gilts now, and not just focusing on high quality corporate bonds.