THE BLOG
09/25/2011 06:52 pm ET Updated Nov 25, 2011

Volatility Is With Us for Awhile Longer

Last week, investors suffered an average market decline of 6.5% in the equity component of their 401Ks, the largest fall since the dark days of October 2008. With $1 trillion of paper wealth evaporating in the process, they enter this week with a mix of apprehension and concern, and rightly so.

Once again, bad company news was not the reason for the market debacle. The corporate sector remains in great financial shape with lots of cash on hand and a favorable debt profile. But, like others with healthy balance sheets in the global economy (and there are quite a few sectors), companies' willingness to hire and invest awaits better policymaking in both America and Europe.

There were three culprits for last week's market dramatic sell-off: first, yet another downgrading of the outlook for global growth, including in the form of a stark warning from the Federal Reserve on "significant" downside risks (and, for an institution that selects its words very carefully, significant translates to something nearer to horrid); second, recognition that this situation increases the challenges facing policymakers who, for the large part, have been MIA for way too long; and third, a worrisome amplification of the crisis in Europe.

So much for last week; how about this week?

Whether they like it or not, and they do not like it, the global economy and markets will remain in the backseat of a car being driven very erratically by policymakers.

Some of the drivers are yet to explain fully enough where the car is headed. Most seem more interested in arguing among themselves than in looking through the windshield. And the car has used up almost all of its spare tires.

This is especially the case in Europe where policymakers have little -- and I stress, little -- time left to get their act together. Remember, their dithering and bickering has already allowed the crisis in Greece to spread to far too many parts of the Eurozone.

It is also the case in America, though to a lesser extent. President Obama's important September 8th speech is yet to sufficiently galvanize the nation and, critically, it has not received meaningful support from Capitol Hill.

These issues were discussed repeatedly this weekend in Washington DC where officials from nearly 190 countries came to attend the Annual Meetings of the IMF and World Bank. Think of it as a group therapy session.

The discussions were robust and frank; and there was widespread realization that bold policy actions were urgently needed to avoid a further deterioration of economic growth, job creation, and income and wealth distribution.

However, as of Sunday afternoon, there was still too little progress given the severity of the global situation. Specifically, no detailed agreement had emerged on the specifics of the solution; and the political context on both sides of the Atlantic is not yet conducive enough for their implementation.

Because of this, frequent bouts of extreme volatility are unlikely to disappear any time soon. Brace yourself for another week in which markets fluctuate wildly in response to any and all signs of policy movements, both forward and back. And this will remain the case as long as both the global economy and markets lack proper policy anchoring in America and Europe, the two biggest economic zones in the world.

The longer it takes for policymakers to get their act together, the more likely that economic and market fragility will increase, the banking system in Europe will become even more vulnerable, and investors will join the growing number of companies that prefer to stand on the side of the road rather than be stuck in an erratically-driven car.