Photo: scarleth white on flickr
Got some questions on the recent turmoil? JP Morgan has some answers.Is it real or just fear? Price action two weeks ago seemed driven more by uncertainty and fear, but last week the sell-off was more “real,” with weaker data and less-than-helpful policy actions.
Can the sell-off become self-fulfilling? The 2008 crisis reminded us of the negative feedback from markets to economies, through capital destruction and a seizing up of lending flows. The fresh memory of that crisis is leading market participants to the same, self-destructive defensive positioning as two years ago, but is also inducing central banks to flood markets with liquidity, to prevent a repeat of 2008. We observe that wealth losses this time around are mostly in equities and very little in fixed income. As a result, bank capital remains intact. With bank capital intact, bank funding largely unmolested, and bank balance sheets much less leveraged, there seems little risk that banks will transmit the market turmoil into a funding crisis for the real economy.