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The Markets Really Are Addicted to Central Bank Liquidity


At some point the ECB or the Fed will once again disappoint. "Without limit" still won't be enough.

Among the common symptoms of crack cocaine withdrawal are:
  • Agitation
  • Depression
  • Intense craving for the drug
  • Extreme fatigue
  • Anxiety
  • Angry outbursts
As an observer of financial markets, I'd offer that every one of these symptoms was evident last Thursday following Mario Draghi's press conference. 

Having promised investors "whatever it takes," the ECB instead offered something less than what the market expected. 

Bond and stock investors reacted violently with an across the board sell-off.

While I realize that linking investors' seemingly insatiable demand for supersized central bank liquidity with crack cocaine addiction invites snickers and is fraught with peril, after seeing Thursday's reaction -- not to mention Friday's even more manic reaction to Mr. Draghi's "without limit" walk back -- the association fits. 

Even more, it matters. 

Whether central bankers like it or not, after almost eight years of extraordinary monetary policy actions, investors' dopamine levels are now tied to the willingness and ability of policymakers to keep the liquidity drugs flowing. 

And investors aren't alone in their dependence. 

Corporate CEO's and CFO's know all too well the benefit of ZIRP to stock buybacks and M&A. With organic revenue growth slowing, many are now reliant on central bank facilitated financial alchemy.

Last Thursday, what we witnessed was not just a broad market sell-off; it was the frenzied response of addicts who having been promised an unlimited supply of their favorite drug were facing a forced withdrawal. The punch bowl was taken away before their eyes and investors freaked out.

While Mr. Draghi believes he saved the day with his comments on Friday, I am afraid that he complicated not only his own situation, but also that of the Federal Reserve. Investors learned that if they behave badly, they can and will get their way. Withdrawal can't and won't happen.  The drugs will just keep coming, especially if investors turn violent. 

The "Greenspan Put" has been replaced by Mario the Mule. 

Draghi will keep the drugs coming no matter what.

That investors believe this narrative to be true may levitate the markets higher in the short run, but the situation is unsustainable.  

At some point the ECB or the Fed will once again disappoint. "Without limit" still won't be enough.

Needless to say, if Thursday is any indication of market withdrawal, the detox that looms ahead won't be pretty.

Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world."  -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation

Twitter: @Peter_Atwater
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