Saturday, 31 October 2015

Ice hockey fighting markets

15:32 Posted by The Thalesians (@thalesians) No comments

Ice hockey is one of those games, where even the casual observer can understand the basic gist of the game. You literally have to score goals to win, however difficult that might be. I don't claim to understand every rule of the game, but whenever I've watched it, it's been fast and fun to watch. The NHL is rarely on UK TV, and when ice hockey is on UK TV, it's usually from the Winter Olympics, which only comes around every four years.
A feature of ice hockey is the fighting. From my research (ok, a quick look at Wikipedia), in the NHL players are not sent off automatically for fighting, although you can be punished through a penalty, such as sitting out the game temporarily for 5 minute. I suppose the hope is that 5 minutes should be sufficient time for the player to calm down and at the same time to act as a suitable deterrent.

Fighting in hockey is also not an uncommon occurrence. According to (yes, there really is a website dedicated to hockey fights), in every hockey season several hundred fights occur. I'm not going to debate whether fighting should or should not be allowed, but regardless, of where you stand, you would have to acknowledge that in a fast moving game, such as ice hockey, a fight is going to slow down the action temporarily.

In a sense, markets are like this. There's calm and calm, till suddenly, volatility picks up and there's a break in the market, price action fights against the previous regime. If it's a sufficiently large vol spike, market participants can flip from seeking yield to capital preservation, and try to cut down their risk. If central banks see contagion risk they might seek to give markets a "5 minute penalty" to calm down, stimulating the economy through looser monetary policy. 

The financial crisis was obviously a classic example of this. I recently went to a public event, with Ben Bernanke, who is currently on a tour to promote his new book Courage To Act, a lot of which centres around the events of 2008. He robustly defended QE, noting that "there is no better thing for the middle class as job creation in the labour market, and that is what QE did". 

Revisiting our analogy, just as with penalties in an ice hockey game, after a while, there's a limit to how much monetary policy can do in isolation. If a player is seriously angry, a short 5 minute break won't calm him down. Bernanke made the point that central bankers have been expected to do too much of the heavily lifting around the crisis. Fiscal policy is also an important part of the dynamic and it is also up to politicians to act. Similarly, if consumers are in a state of severe risk aversion, looser monetary policy might not be enough of an incentive to get them to start spending again.

Sometimes, if a fight a severe enough, it'll take more than a penalty to stop it: monetary policy can only do so much...

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