Investors Best Prepare to Cope with More "Balks"

by Paul Moroz, Mawer Investment Management

It’s the top of the 4th inning. Investors are crouched at the plate, and given the count, are expecting a fast ball – at least somewhere near the plate.  Muscles tense in anticipation of the pitch. The pitcher steps into his wind up… and… stops.

Was that a balk? This might be the action that central banks and governments around the globe are beginning to commit.

For those not familiar with baseball terminology, Wikipedia can help us out: “In baseball, a pitcher can commit a number of illegal motions or actions that constitute a balk. Most of these violations involve a pitcher pretending to pitch when he has no intention of doing so.” Arguably, the Fed may have balked when it failed to follow up on tapering its Quantitative Easing (QE) program. It had certainly signaled its intentions to slow bond buying. Why balk?

Central banks and governments are caught between a rock and a hard place. Most recognize that an easy money policy leads to capital allocation problems in the economy and acts as a tax on savers. The preference, for most, is a normalization of interest rates—and stimulus spending for that matter. Indeed, investors have been at the plate waiting for better pitches (i.e. reinvestment rates) and few people disagree that central banks are artificially repressing reinvestment rates around the world. But how much can the economy take? The previous jump in 10 year bond yields due to Fed taper talk may have already been enough to put the brakes on housing starts and mortgage refinancing, and crept into confidence. Go slow and keep it low, might not be a bad policy.

In Japan, the Abe administration has also stepped up to the mound and is preparing to throw its own sort of pitch. The regime has decided to increase the consumption tax rate from 5% to 8%, slated to go into effect on April 1. Will they actually throw the ball or will they balk?

Tough love is not fun to implement, even putting aside politics and the myopic qualities of human nature. Investors should be prepared for more balks from governments and central banks in the middle innings of the investment ball game.

Paul Moroz

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