Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Central Banks Fool The Markets Again, But Only For A Little While

Stock-Markets / Financial Markets 2016 Feb 16, 2016 - 10:50 AM GMT

By: John_Rubino

Stock-Markets

Over the weekend, the following happened: China’s exports and imports fell by 11.2% and 18.8%, respectively, numbers which, for a trading power, are nothing short of apocalyptic. Japan’s Q4 GDP shrank at an annualized rate of 1.4% which, for a country that had spent the previous three years borrowing and printing record amounts of new currency, is an extraordinary admission of failure. And US allies Turkey and Saudi Arabia appeared to be invading Syria, putting them — and by implication the US — in direct confrontation with Russia.


This combination of disturbing trends and events would, you’d think, produce a dark and chaotic opening for Monday’s global financial markets. But you’d be wrong, because while the above was going on, Mario Draghi, head of the European Central Bank announced that he “will not hesitate to act” to keep the past month’s instability from spreading. And traders responded the way they’ve been trained to, with panic buying of pretty much every dicey financial asset and panic selling of safe havens like gold, Treasury bonds and euros.

This came after previous attempts by central banks — including China’s yuan devaluation and Japan’s foray into negative interest rates — failed to get the markets’ juices flowing. So why did Draghi succeed? Three reasons:

1) He has a history of this kind of thing. Recall his 2012 “whatever it takes” promise that ignited the most recent leg of the global asset bubble. So despite the fact that he doesn’t actually do much, traders seem to find the ex-Goldman Sachs banker’s words inordinately comforting.

2) One of the things Draghi seems to be offering this time around is protection against Italy’s imminent banking system implosion. 18% of Italian bank loans are “non-performing,” i.e., not making payments. This is almost without precedent for a whole country and extremely rare for individual banks — usually the latter die before things reach this point. So if the ECB changes the rules to, for instance, allow Italian banks to use non-performing loans as collateral for new financing, that might keep them alive for a little while longer. Though at the cost of vastly increased taxpayer liabilities.

Traders of course don’t care about vague notions of future obligations, assuming that they’ll be inflated away or otherwise forgiven by some future Super Mario. So the prospect of bank bailouts is, to them, an unalloyed good thing.

3) It was time for a counter-trend rally. The first six weeks of 2016 were among the worst starts to a year ever for stocks and junk bonds (and among the best ever for safe havens like Treasuries and gold). Trends don’t go in a straight line; instead they take two steps forward and one step back, repeating those dance steps until the cycle ends. So traders were waiting for an excuse to buy suddenly-cheap bank and tech stocks.

Based on past experience, the pop might endure for another few days or even weeks. But then the abject failure of recent central bank experiments will once again start to color perceptions. To take just a couple of examples: Four years after Draghi’s “whatever it takes” boast, Italy, as previously mentioned, is imploding and Deutsche Bank, Germany’s dominant financial institution, is releasing a drumbeat of bad/ominous news including escalating losses, massive lay-offs and flat-lining divisions. It is now being mentioned in the same breath as Lehman Brothers.

Japan, meanwhile, offers a useful clue about the effectiveness of whatever the ECB and for that matter the Fed might try next. The money it has pumped into the economy, as measured by central bank assets — the bonds and stocks it has bought with newly-created yen — rose from 25% of GDP in 2007 to nearly 80% today. But the Japanese economy has gone exactly nowhere. For a great recap of the wasted effort that is QE, see $12.3 trillion of QE has added up to…this?

In short, the limits of this kind of monetary policy are now visible for all to see. Despite differing levels of ease, all the major economies are performing pretty much the same way, with slow to slightly-negative growth, steadily increasing debt, and spiking asset price volatility. More QE is unlikely to change that.

So…what next? Probably a brief respite from “risk-off” followed by the resumption of turmoil (financial, geopolitical or both). Into this breach will step the US Fed because, as Deutsche Bank noted today, only the Fed can do it:

By John Rubino

dollarcollapse.com

Copyright 2016 © John Rubino - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 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