Macquarie says investors have become complacent because they now expect policymakers to bail them out

  • The term “buy the dip” has become commonplace in financial markets in the post-GFC era.
  • Bad news is really good for asset prices, increasing the odds of further stimulus measures being rolled out by policymakers.
  • Monetary policy has been the dominant force in helping to keep asset prices elevated and economic activity ticking over during the past decade.
  • Looking ahead, Macquarie believes that fiscal policy will take its place, suggesting there is “plenty of ammunition left”.
  • The bank says this is a “recipe for low volatilities, rising and more resilient public-sector-driven cycles”.

The term “buy the dip”, and other forms of the phrase, has become commonplace in financial markets in the post GFC-era, especially among those who like to dabble in stocks and bonds.

More often than not, whenever there’s a decline in prices, the immediate question investors ask is “when should I buy the dip?”

Chinese data is terrible, buy the dip. Further policy stimulus is on the way the Chinese government.

The US three-month 10-year yield curve has inverted, buy the dip. It’s more likely the US Federal Reserve will cut interest rates given increased recession risks.

Italy’s budget position is deteriorating, buy the dip. The European Central Bank will probably launch another round of quantitative easing.

You get what we’re saying — bad news is actually good, increasing the odds of more cheap money flooding into asset markets.

It’s all investors have come to expect over the past decade.

If things start to look a little gnarly, the state, or central bank, will step in to support asset prices, providing a back-stop that has helped to reduce volatility and help foster the mindset of “buy the dip”.

“Investors are complacent because they no longer believe in free markets, and expect that any damage from trade wars or politics would be offset by monetary and fiscal tools,” researchers at Macquarie wrote in a note released this week.

That complacency, as Macquarie calls it, was seen earlier this week with an initial selloff in stocks sparked by an escalation in trade tensions between the United States and China quickly bought by investors, reflecting the belief that it increased the odds of more stimulus being rolled out in China and a rate cut from the US Fed by the end of this year.

‘Buy the dip’ was back in full force yet again.

But can it last?

Monetary policy settings from many major central banks are already extremely loose, raising question as to its ability to support economic activity and keep asset prices elevated beyond what’s already been seen.

While monetary policy, to some, may be at or near its exhaustion point, Macquarie isn’t convinced policymakers will be powerless to keep the status quo in place.

“Investors are concerned that after decades of activism we are finally reaching the end of the road. We disagree,” Macquarie wrote.

“While private sector solutions are better, we believe that private sectors are unlikely to revive, and it is public sectors that stand between us and a deflationary bust.

“Investors should not be thinking about ‘normality’, but rather what ‘poison’ they would prefer.”

Whereas monetary policy helped to revive economic activity and lift asset prices in the post-GFC era, Macquarie says it is fiscal policy, potentially experimental, that will take the reins in the period ahead.

“Over the last decade, it was mostly about monetary policies, trickle-down economics and portfolio impact,” it wrote.

“Going forward it is likely to be a direct injection of stimuli into the bloodstream via localised fiscal policies, supported by neo-Keynesian and/or Modern Monetary Theory (MMT) tools.

“The state has plenty of ammunition left, and we maintain that the United States, European Union and China will all likely introduce significant fiscal stimuli into 2020/21.”

And that, Macquarie believes, will likely help to suppress financial market volatility and keep economic activity ticking over.

“It is a recipe for low volatilities, rising and more resilient public-sector-driven cycles,” it wrote.

If that is the case, buy the dip could be around for quite some time yet.

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