All eyes have been focused on the U.S. Federal Reserve lately. But European Central Bank President Mario Draghi did his best to grab the spotlight this morning.
Specifically, Draghi didn’t cut interest rates. He didn’t launch additional QE. And as I mentioned yesterday in Money and Markets, even if he did, it’s not enough to overwhelm the “QT” we’re facing now. But he did throw a few dovish bones to the markets.
First, he revised the existing program to allow the ECB to buy as much as 33% of any particular bond issue, up from 25%.
Second, he said there were more “downside risks” to the inflation and economic growth outlook.
|Europe faces “downside risks” to the inflation and economic growth outlook.|
Third, he suggested Euro-QE could go beyond the current time limit of September 2016 if needed.
The immediate impact was to send the euro currency as much as a penny and a half lower against the dollar, and to send stocks higher.
So the natural question is, “Should you buy?” And as a corollary, does one day’s market action mean we’re right back in the same central bank-driven regime we’ve had for the past six-and-a-half years?
I’m going to answer as clearly and candidly as I can: No. I have said repeatedly that the August turmoil here, the worldwide market selloffs over the past several months, and the global economic slowdown that helped cause all of it, prove that the world’s central banks have lost control of the markets for more than the very short term.
What’s more, QE has been proven ineffectual repeatedly, including in Europe. Even the Federal Reserve’s own experts admit it. Why would Draghi even have to raise the issue of doing more QE — a mere six months after launching the program in the first place – if it actually worked to spur inflation and growth?
|“A key factor weighing on commodities and the U.S. markets has been the strong dollar.”|
That’s not all, either. A key factor weighing on commodities and the U.S. markets has been the strong dollar. It weakens our competitiveness on the world stage, crimps the profit of multinationals, and otherwise makes doing business tougher for American companies.
So IF the buck strengthens substantially again on this Euro-QE news (or anything else), that’s not a good thing for our markets. It’s another negative.
Bottom line: I don’t think it will pay any more to buy into central bank-driven rallies. I think you want to take advantage of bank-driven markets to sell.
For the first time in more than six years, I don’t think you’ll be alone — because investor trust and faith in banker omnipotence has been lost. That’s the message the markets have been sending out for months now. And it’s the message the markets sent out today, when an early rally of almost 200 points in the Dow fell apart into the close.
Do you think I’m on to something? Have central banks lost the power to influence markets for more than the very short term? Or do you think I’m underestimating their abilities? Are you “buying Draghi,” or selling him? Let me know over at the Money and Markets website.
Iran, the stock market, Fed policy, and a whole lot more: That’s what you were discussing over at the website.
Reader Frebon said the Iran deal is bad policy, adding: “We should get a grass roots movement to create a super PAC fund to ensure that no representative or senator who votes for the Iran deal gets re-elected. When this starts going, they will be scared to death and change their minds because getting re-elected is obviously much more important to them then the welfare of the country and all Americans.”
Reader Butch J. took a similar position, saying: “I can’t believe that the Democrats have lined up for this Iranian deal, and I am a 68-year-old registered Democrat. Do they not know the danger it puts us and Israel in? They say it is deal or war, but it will more than likely cause war. It will also disrupt the oil industry and cost plenty of Americans their jobs.”
Shifting to the Federal Reserve and monetary policy, Reader Alejandro said: “You are right on tighter money supply. Measured in dollars, it is tighter globally due to depreciation in euro and Japanese yen. In others words, with the dollar much stronger and the end of QE in the U.S., other central banks cannot substitute the supply.”
Reader J.R.J. added: “Anything the Fed does is just to enable the government to continue with the welfare state. They are going to do everything to keep the Titanic afloat until the next guy takes over. Same as usual. The only thing that would end the game would be the collapse of these dishonest fiat currencies.”
Lastly, when it comes to the stock market, Reader Richard J. said: “Here we go again: The market down 400+ one day, then up the next day 375 +/-. Nobody can tell me that this isn’t a game being played by the BIG market players who are making money at both ends.
“Us little guys with so very little money to play with, who are 15 years into retirement, have to sit on our good, blue-chip, dividend-paying companies and hope that sanity returns to a greed driven market.”
Reader Phil added: “As long as you don’t need capital, those blue-chip dividends will continue to provide income, regardless of the notional stock value.”
Bottom line: Many of you are fed up with Fed policy and fed up with crazy market volatility. The problem, as I see it, is that volatility isn’t going away anytime soon.
We have a global currency war underway. We have economic weakness in many corners of the globe. We have computerized trading systems potentially running amok (see my news item below). And we have central bankers who are now largely out of effective bullets. That means big moves, both up and down, are going to be the norm.
But I don’t think throwing up our collective hands and leaving the arena is the best option. Instead, I believe we can take this volatile market on together – and peel off significant profits from it. That’s because volatility and major trend changes create significant opportunities for those who have seen it before, like your editors at Money and Markets.
Want to add to the discussion threads on markets, Iran, monetary policy or anything else? Then here’s the link where you can do so.
China held its People’s Liberation Army parade and celebration overnight, parading tanks, troops, and other equipment through Beijing, while flying its jets overhead. The country’s leaders also announced they would shrink the military by 300,000, a move that will free up more money to spend on advanced weaponry and naval and air force equipment.
Central banks the world over have missed their inflation targets for the past several years, though it hasn’t been for lack of trying. This Bloomberg story does a good job of showing this isn’t a problem here in the U.S. only. It’s a worldwide failure of low rates and money printing to achieve the primary, stated goal: Boosting prices.
Investors and analysts up and down Wall Street have tried to explain why stocks went berserk in August. The latest theory from the influential founder of Omega Advisors, Leon Cooperman, is that so-called “risk parity” and momentum-based, computerized strategies were responsible.
A whopping $600 billion in investor funds now follow a risk parity strategy, which involves dynamically adjusting exposure to various asset classes over time. The problem? It tends to go haywire (in “technical terms”) when volatility explodes like it did last month. The selling pressure may not be over, either, according to the Financial Times.
I don’t talk about the Challenger, Gray & Christmas report on corporate layoffs very often because it’s a minor economic indicator. But it’s worth mentioning that it showed a 2.9% year-over-year increase to 41,186 in August. That was the seventh month of annual increases. It also puts us on pace to have the highest number of announced layoffs since 2009 for the full year.
Do you have any thoughts on China’s military pomp and circumstance, and its plan to modernize its army, navy, and air force? What about the impact of computerized, automated trading strategies on stock prices? And should we be concerned about rising layoffs? Head over to the website and share your opinions when you have a minute.
Until next time,