These guys just don’t get it … still!
That’s all I could think this week after reading a pair of stories. One focused on how European Central Bank head Mario Draghi is trying to browbeat the Germans into agreeing to more QE and massive deficit spending over there. Another suggested that the “Oil slide puts central bankers over deflationary barrel” — and that the supposedly sensible reaction is even more global easing.
Why does this kind of stuff infuriate me?
First, we are what? Six years past the depths of the credit crisis and Great Recession? The U.S. Federal Reserve has launched QE1, QE2 and QE-Infinity, while the Bank of Japan has been printing trillions of yen and buying bonds, ETFs, and more in its own version of QE for years.
What do we have to show for it? Nothing!
|The boatloads of money that central bankers have printed over the past few years hasn’t done squat for the real economy.|
It hasn’t done a hill of beans good for the real economy, even as it has artificially inflated asset prices. Heck, even the head of the International Monetary Fund (IMF), Christine Lagarde, admitted as much when she said a few days ago that thanks to money printing, “There is too little economic risk-taking, and too much financial risk-taking.”
So why the heck would Draghi think it would do any good in Europe? The truth is, it won’t! We have the proof here already. After all, if QE really turbocharged the real economy, why would the Fed keep rolling out new iterations of it every year or so?
Second, let’s talk about this freak out about falling inflation caused by the declining price of oil. Excuse me, but why would central bankers want to drive up raw costs to spur inflation? That’s totally backwards thinking!
“Good” inflation is inflation in wages that gives us all more money to spend, even as our costs and expenses go down. “Bad” inflation is when wages are going basically nowhere (as they are doing now) but costs are going up, resulting in less disposable income!
Think about it: Let’s say you earn $500 a week, but have to spend $200 on unavoidable expenses. That leaves you with $300 left over to spend on everything else.
Would it be a “good” thing if your expenses were to rise by $200 a week, even as your $500 paycheck remained flat? Of course not! You’d only have $100 leftover to spend on everything else.
Yet modern central bank thinking seems to be that driving currency values down, driving up raw costs, and otherwise spurring this “bad” inflation is somehow beneficial! Do you see why I think these people are off their rockers?
Bottom line: Modern central bank thinking suffers from two “fatal flaws” — the belief that all inflation is good inflation, and the belief that QE actually does something useful for the real world. And I believe that even the blockheaded “experts” on Wall Street are finally, grudgingly accepting that reality.
Truth be told, I believe that’s one of the major reasons the stock market is suffering these days. Sure, headlines about Ebola, ISIS, Putin, and more don’t help. But if investors are finally being forced to acknowledge that all the king’s QE and all the king’s low interest rates can’t put the Humpty Dumpty global economy back together again, that’s a recipe for disaster for many low-rated, higher-risk stocks, especially foreign ones.
So please make sure you’ve taken some of the steps I’ve recommended already — grabbing profits, cutting losses on losers, and raising cash. Also start looking into downside hedges again. I’m talking about things like inverse ETFs that are designed to protect you if Europe, Japan, China, and other foreign economies threaten to drag us down into the financial abyss.
Make sure you also swing by the Money and Markets comment section and let me (and your fellow investors) know what you think about all of this.
Is the central banking cabal finally meeting its match — the realization that low rates and more QE simply aren’t working anymore? Are the ongoing economic problems overseas finally pushing the U.S. economy over the edge, setting the stage for a nasty market decline? Or is this recent pullback nothing more than another correction on the road to higher prices?
Until next time,