Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Fox in the Henhouse: Why Interest Rates Are Rising - 23rd Apr 18
Stocks and Bonds, This is Not a Market - 23rd Apr 18
Happy Anniversary Silver Investors! - 23rd Apr 18
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

A Dangerous Central Bank Party - The World is Awash with Easy Money

Economics / Analysis & Strategy Feb 24, 2007 - 12:20 AM GMT

By: Money_and_Markets

Economics

Mardi Gras 2007 just wrapped up. The revelers have gone home. The garbage is being swept up. The Big Easy won't be hosting another one of its famous parties until next year …

But the world's central bankers? They aren't putting away the party beads or the booze. Instead, they're still doling out the easy money and saying, “Laissez les bon temps rouler!” (“Let the good times roll!”)

Now, there's nothing inherently wrong with a party. But there's also a time and place for a celebration. And in a moment, I'll tell you how the parade could careen out of control.


First, I want to tell you a little bit more about central bank actions around the globe. Let's start with the U.S. …

“Gentle Ben” Bernanke Lives Up to His Name

Last week, in testimony before Congress, the Fed Chairman sounded like he didn't have a care in the world. His comments practically overflowed with optimism …

“Gentle Ben” Bernanke Lives Up to His Name

Rising prices? No problem! Here's what Bernanke said,

“Inflation pressures appear to have abated somewhat following a run-up during the first half of 2006. Overall inflation has fallen, in large part as a result of declines in the price of crude oil. Readings on core inflation — that is, inflation excluding the prices of food and energy — have improved modestly in recent months.”

The future outlook? It's all good! Quoth Bernanke,

“The projections of the members of the Board of Governors and the presidents of the Federal Reserve Banks are for inflation to continue to ebb over this year and next.”

Gentle Ben went on to say that housing is already bouncing back, and that the unfolding disaster in subprime mortgages is contained and won't affect bigger banks.

Bernanke's testimony was also noteworthy for what he didn't say. The Fed head didn't say much about the near-record low in credit spreads … the explosion in leveraged buyouts … the ridiculous prices being paid for commercial property … or any one of several other signs that monetary policy is anything but tight.

Heck, he made no mention of the fact that U.S. money supply rose 5.3% year over year in December, the biggest gain in almost two years.

In short, Bernanke's message was, “Let the good times roll!”

It's the Same Story In Japan and the U.K.

Japan is arguably the world's biggest supplier of excess liquidity and easy money. So traders held their collective breath as this week's Bank of Japan meeting approached.

The big question: Would the bank make up for its last meeting, when policymakers basically bowed to political pressure and kept rates stable?

On Wednesday, we got the answer. The Bank of Japan did hike short-term rates to 0.5% from 0.25%. But at the same time, policymakers assured the markets that this wasn't the start of some Godzilla-like rate-rising rampage. According to Governor Toshihiko Fukui, “There's no change in our stance that adjustments will be made slowly.”

Translation: “Let the good times roll!”

What about the U.K.? Well, British policymakers surprised the market with a rate hike in January. But it was a close call, with a vote of 5-4 in favor of hiking. Moreover, minutes from the meeting show that banking officials were concerned that “a closely spaced series of interest-rate increases might lead to excessive tightening.”

Let me tell you, monetary policy in the U.K. looks as easy as ever. The broadest measure of money supply (M4) jumped 13% year over year in January, just shy of a 16-year high!

I could go on and on. For example, in countries like India and Thailand, political pressure is mounting on central banks to stop hiking rates. Even the European Central Bank is getting flack for its recent series of rate hikes.

Result: The “let the good times roll” mantra is being translated into other languages all over the world.

Here's the Problem with The Easy Money Atmosphere

Here's the Problem with The Easy Money Atmosphere

Too much easy money almost always leads to heartache down the road. Just look at the high-risk mortgage market …

The Fed's reckless monetary policy and hands-off regulatory approach helped inflate the biggest housing and lending bubble in U.S. history. Encouraged by the monetary largesse, lenders gave money to practically every borrower with a pulse.

Now, borrowers are saddled with loans they can't pay back. Mortgage delinquencies and foreclosures are surging. And we're seeing the most widespread declines in home prices in U.S. history.

The Nasdaq boom and bust is another example …

Alan Greenspan mused about “irrational exuberance” in the mid-1990s. But then he let the matter drop. As a result, stock traders went wild, driving tech and Internet stocks to the moon. Later, stocks crashed and many investors lost their life savings.

So, where are the danger areas right now? In my opinion, here are two markets that are currently being over-inflated by easy money:

1. Commercial property — Values are surging through the roof, and property “yields” are dropping to record lows. We're also seeing the biggest Real Estate Investment Trust (REITs) buyouts in history.

2. Derivatives — The liquidity flood is encouraging hedge funds and big financial institutions to go hog-wild with derivatives, which are financial instruments based on other assets (options, futures, swaps, etc.). As of June 2006, total over-the-counter derivatives volume had surged to a whopping $370 trillion , 32% higher than the previous year and 68% higher than the same period two years earlier.

And don't forget that there's another side effect of easy money — inflation. Too much money chasing goods and services drives up prices.

Just look at what happened in January — the core Consumer Price Index, which excludes food and energy, jumped 0.3%, topping forecasts. The year-over-year core inflation rate is now 2.7%, well above the Fed's 1% to 2% comfort zone.

Here's what I suggest: Ride this wave of monetary largesse while it lasts. But focus on investments like:

  • High-yielding foreign shares: There are lots of attractive foreign companies out there, and U.S. investors can potentially win in three ways — capital gains, dividends, and favorable currency exchange rates.
  • Gold: Gold blasted off on Wednesday, jumping $23 an ounce to a nine-month high. The yellow metal tends to do well when inflation fears are rampant.
  • Other natural resources stocks: Crude oil recaptured the $60-a-barrel level this past week, and other natural resource-related shares look poised for more gains, too.
  • Select stocks in winning sectors here in the U.S.: In my book, there are still some attractive areas in domestic markets, including defense companies and consumer staples shares.

However, please understand that the good times won't last forever. Use risk-control measures like stop losses, and keep a hefty chunk of money in cash or cash-like investments.

After all, the party shut down on Bourbon Street this past Wednesday. And it'll shut down on Wall Street at some point, too.

Until next time,

By Mike Larson

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.MoneyandMarkets.com


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules