You see, ECB President Mario Draghi and his fellow policymakers met in Frankfurt to brainstorm yet another “whatever it takes” plan to save the financial world. Never mind that none of the previous programs met their objectives, with inflation lagging the ECB’s 2% target for three years. Draghi was determined to give markets everything they wanted (and then some) at his latest policy meeting. So he …
Cut the ECB’s refinancing rate to 0% from 0.05%…
Cut the deposit rate to -0.4% from -0.3%…
Expanded “Euro-QE” to a pace of 80 billion euros per month from 60 billion…
Added euro-denominated, investment-grade corporate bonds to the list of assets the ECB can buy with its QE funny money…
Extended the projected ending date of QE to at least March 2017 from September 2016…
Launched four new “TLTROs,” targeted loan programs designed to incentivize banks to lend to the real economy.
In short, he tried to do everything he could to signal that monetary policy still has potency. But the natural question investors asked right away was: “What next?” How do you follow up your bazooka?
|What do central banks, such as the ECB, have left?|
The answer the currency market arrived at very quickly was “nothing.” When the ECB’s actions were first announced, the euro currency tanked sharply. So did the Swiss franc and other currencies — indicators of Draghi’s “success.”
But after falling to as low as 1.082 against the U.S. dollar, the euro completely reversed course several minutes later. Then it surged to an intraday high of 1.122 — a swing of more than 3 cents. That’s a huge move for a currency, and it was mirrored in other currencies like the Swiss franc.
Or in plain English, we’re witnessing yet another HUGE central bank “fail”! Coming on the heels of the Bank of Japan’s fail in late January, it makes something abundantly clear: Central banks are losing the illusion of market control, just as I warned last month.
Currency investors are SELLING into their policy announcements, rather than BUYING into them. That is a complete 180-degree turn from what we saw during the bull market period stretching from 2009 through early 2015.
“Fail”-style trading also spilled over into the stock market. The Dow Industrials surged more than 125 points shortly after the open. But then stocks completely reversed course, with the Dow dropping deeply into negative territory before ultimately closing down slightly.
Bottom line: The era of investors mindlessly buying assets on every new round of monetary hocus-pocus is over. Investors can, should, and are challenging central bank happy talk because they can see that more than seven years of this stuff isn’t working. Policymakers are missing their own inflation targets from one end of the globe to the other, and worldwide economic growth is running at its weakest level since the tail end of the last recession — despite massive infusions of easy money.
That’s not just my view, by the way. It’s what the International Monetary Fund, the Organization for Economic Co-operation and Development, the Bank for International Settlements, and other groups — groups that include or meet with central bankers all the time — admit themselves.
In this environment, you have to take your financial future into your own hands. You can’t rely on policymakers to repeatedly bail you out anymore, given the increasingly volatile and treacherous economic and market environment.
|“Investors can, should, and are challenging central bank happy talk.”|
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If you can spare a few minutes, please also share your thoughts on this latest central bank foul up in the comment section below. What do you think the market reaction today is signaling about policy, and its effectiveness (or lack thereof)? Could this reversal lead to more selling, or do you think the bounce in stocks has further to go? Let me know.
Meanwhile, I asked yesterday what you thought about the surge in inventories in the U.S. economy, and what it means. I’m glad that several of you took a few minutes to reply.
Reader Al said: “The downside of accumulating inventories will not only impact the market, but it may also result in manufacturing employment layoffs. This could become a very serious issue.”
Reader Anthony G. added: “The market has clearly produced goods that consumers are not willing and able to purchase.”
With regards to how the auto industry may be contributing, Reader Chuck B. said: “If you thought year-end car deals were pretty wild, you ain’t seen nothin’ yet. Wait until dealers come to the end of the 2016 model year, and their lots are still piled up with 2015 inventory because of the makers’ overproduction.
“You might get a free ’15 giveaway with your reduced-priced ’16. Maybe a free repo, anyway, as people are running four to six months late on payments.”
Lastly, Reader JFW weighed in on what might (or might not) compensate for manufacturing weakness: “Will the service sector carry the economy? Who knows? The bigger question is monetary policy and the big word is POLICY — which is driven by human intervention and that is the real problem. POLICY is not some rule of physics but a human problem.”
Thanks for sharing your opinions. I find it very hard to believe we can have a “private” recession in manufacturing … and a near-depression in energy … without it ultimately infecting the broader economy. We’re already seeing things like the ISM services index deteriorate. As credit gets tighter and weakness spreads, that should put increasing pressure on risky asset prices.
Go ahead and hit up the discussion sector below if you have any other thoughts you want to add.
Is free trade (and the consequences thereof) going to be a key campaign issue in this year’s presidential election? That’s the angle this Wall Street Journal story takes.
It discusses mounting opposition to free trade deals from an increasing number of Republicans, in addition to the long-standing opposition from Democrats. Opponents say the U.S. loses millions of jobs because deals like NAFTA and TPP open up our markets to foreign producers who pay their workers much less than American firms, while offering few benefits in exchange.
Government bond markets in the U.S. and abroad are trading in an increasingly dysfunctional manner, with wild price swings and odd yield and price moves becoming more common. The Financial Times reported today that anomalous differences between cash Treasurys and futures contracts based on Treasurys are showing up more and more often. Arbitrageurs can’t capitalize on the difference because of regulatory constraints and tighter funding markets.
Amazon.com (AMZN) has inked a deal with Air Transport Services Group (ATSG) to increase the speed of package delivery. The Internet retailer will lease several Boeing (BA) 767 airplanes from ATSG as part of a plan to deliver more packages in-house rather than relying on UPS (UPS) and FedEx (FDX). Amazon already uses staff couriers and its own trucks for some shipments.
What do you think about the focus on free trade – is it a threat or a benefit to our economy? Should we be concerned about the increasing liquidity problems in even government bond markets? How about Amazon’s latest move? Do you think it’s a wise move to bring more shipping operations in-house? Let me hear about it in the comments section.
Until next time,
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