In its latest fund manager survey, Bank of America says central banks have created a “safe space” for investors with interest rates that are expected to remain low and stable.
And while your initial reaction to the creation of a “safe space” in markets might be positive, I don’t think this is a ringing endorsement of central bank policy. In fact, it’s more likely the exact opposite.
In recent years, college campuses have been flooded with calls for the creation of “safe spaces,” or areas where students are shielded from “triggering” language or symbols, a broad catch-all for things students could (or do) find offensive or traumatic.
Extending this idea to central banks and the relationship they have with financial markets, BAML’s core argument seems to be that any time markets fall, central banks are there to say something “comforting” about how they will not be tightening monetary policy.
During the financial and eurozone crises, things like Ben Bernanke’s pledge to act “forcefully and without hesitation” and Mario Draghi’s famous “whatever it takes” proclamations are what markets needed to hear.
Several years after these crises, and with monetary policy still very much in a crisis stance, this “safe space” has become a crutch for markets, a call-and-response of sorts that leads to hawkish commentary from central bankers leading to a sell-off in financial markets leading to dovish commentary from central bankers leading to a rebound in financial markets and so on.
This loop is how we end up with calls like what we saw out of Deutsche Bank recently when analysts there said a “collapse” in financial markets is perhaps what we need to get the “right” response from policymakers (which in DB’s view would be fiscal rather than monetary stimulus).
Notably, elsewhere in the survey investors show a clear preference for companies to invest excess cash rather than repair balance sheets or return money to shareholders, essentially a call for the corporate equivalent of fiscal stimulus.
Earlier this year in a graduation speech given at the University of Michigan, Former New York City Mayor Michael Bloomberg railed against safe spaces, saying, “The fact that some university boards and administrations now bow to pressure and shield students from these ideas through ‘safe spaces,’ ‘code words,’ and ‘trigger warnings’ is, in my view, a terrible mistake.”
The argument against safe spaces is that these spaces are not, in fact, safe. Rather, protecting students from things they find uncomfortable and even offensive is the exact opposite of the mission for universities many think ought to challenge young people.
And so on.
But to bring this back to markets, BAML’s view is that the recent uptick in investor confidence along with a continued preference for what they call deflation assets (real estate, cash) over inflation assets (stocks, oil), is evidence of this “safe space” habit among investors.
With the overarching theme being that safe spaces are safe in name only.
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