Diminishing Marginal Returns

US equity pre-opening futures priced in a sharp rise in trading as a result of the ECB’s insistence on continued “aggressive intervention” by way of lower rates and expanded QE yesterday morning. However, investors have apparently grown increasingly less enamored with the potential for monetary policy to positively affect demand. Markets in Europe closed lower across the board while US equity markets were only able to manage a mixed close. The S&P 500 closed flat (+0.02%) while the Dow Industrials (-0.03%) and Nasdaq (-0.26%) lost incremental ground. Volume however did expand on both the NYSE (+12.05%) and Nasdaq (+8.67%). Markets remain in a confirmed uptrend.

The law of diminishing marginal utility is a law of economics stating that as a person increases consumption of a product, while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product. – Source: Investopedia

It is a term, that I believe describes the increasing futility of central bankers in using monetary policy to stoke both demand and an enthusiastic response by investors. Since the most recent onset of monetary easing and creative quantitative easing, as a result of the financial crisis, it is clear that with every announcement of accommodation by the ECB, as well as other central banks, that markets are pricing in ever increasing doubts as to the effectiveness of monetary policy alone in dealing with global demand weakness. If you remember the enthusiasm that used to greet news of accommodation, it hardly seems possible that markets would now ignore the news entirely. Not only have investors grown accustomed to the one sided policies espoused by central bankers to stimulate growth, investors are doing something else. They are becoming skeptical. That skepticism reflects a development in the relationship between central bankers and investors that is not only new, it is very troublesome. Central bankers have long had an unshakable confidence in investors, in that there has been a high degree of certainty that the cause/effect relationship between monetary policy and anticipated results was a foregone conclusion. The futility with which the ECB has attempted to manage Europe’s stagnant economy is increasingly looking very similar to the what has been present in Japan for over two decades. Japan’s economy has posted near stagnant growth since the 90’s despite unprecedented accommodation by the Japanese central bank. Now we are seeing similar results in Europe. Further, ECB’s Draghi has made it clear that the default position for monetary policy by the ECB is more, not less, accommodation. From Japan to Europe negative interest rates are becoming a part of the monetary policy lexicon. Negative interest rates are a sign that there is some systemically wrong.

flickr photo: Dustpuppy72