Since the S&P downgrade of the U.S. credit rating, stocks swung 4% on four consecutive days last week, a fairly rare event in stock market history.
PIMCO Managing Director, Neel Kashkari said in an interview with Bloomberg TV that he blamed Washington for the market volatility:
“I think the markets are reacting to the complete dysfunction in Washington. We now know the easy things that have been tried don’t work, what’s left are the long-term structural solutions and yet Washington is at a maximum state of dysfunction.
In effect Washington is telling the markets you’re on your own, you’re not going to find any more solutions from us and so, to me that’s one of the real sources of this extreme volatility that we’re seeing in the equity markets.”
Kashkari said despite the downgrade, and concerns over America’s ability to repay its debt, investors wary of equities were rushing to treasuries:
“Think of a building. Treasuries are the foundation that have underpinned the entire global economy. If you’re at the top of the building and you feel that foundation shift, even a little bit, what do you do? You run down the stairs toward that foundation, because a minor movement in the foundation can lead to large swings at the top of the building.
So, minor movements in treasuries are leading to large swings in equity markets, and risk assets, and people are trying to move back down to the foundation because they’re scared… “
Kashkari said he couldn’t argue with S&P’s downgrade given the dysfunction in Washington. He said mere quantitative easing and short-term stimulus would not work again unless the Fed could sort out the composition of the stimulus money, and, Washington could make long-term structural reforms.
Watch Kashkari talk about U.S. market volatility and the eurozone debt crisis at Bloomberg TV: