$2 trillion dollars. 7 years after the financial crisis two central banks have decided to flood financial markets with additional liquidity in an effort to produce growth and inflation. On October 31, 2014 it was the Bank of Japan which surprised markets with $720 billion in monetary expansion. Today it was the ECB who exceeded long awaited expectations by coming out with a $1.3 trillion program of their own.
But that’s not all of course, no wait there’s more. More cash needs to be injected into markets apparently by making holding actual cash toxic waste. Consider the central banks that have cut rates in recent weeks:
Canada, Denmark, India, Switzerland, Egypt, Turkey, Romania, China, who else am I missing? They all have cut rates. Many into negative territory. Yes you actually get penalized for holding cash.
All of this action is self evidently reflected in markets creating massive havoc.
Currencies are the most obvious victims.
The Euro is being obliterated:
The Yen is engaged in a multi year long Harakiri:
They all are taking their cue of course from the US Federal Reserve who has led the game of perceived consequence free monetary expansion:
Look, you just press here & when it doesn’t work you press it again…and again… pic.twitter.com/tDi2p8WrMC
— Northy (@NorthmanTrader) September 4, 2014
What’s all this actually achieving?
Sadly preciously little. It does make for good headlines in stock markets as markets jump like good soldiers to attention whenever a central bank makes a move or utters words like “extension” or “patience”.
As is plainly evidenced from the charts and correlated central bank actions they are the single largest driver of price:
High stock prices benefit of course those who own them which is not the majority of people.
Yet over $4 trillion of FOMC monetary expansion and now an additional $2 trillion in European and Japanese QE efforts have to be held to account to reality: Their efforts have not produced growth and even the supposed oasis of growth the US can point to 10 year rates lower than during the depth of the financial crisis: Below 2%.
No sign of growth or inflation.
In Capital Tug of War we expressed concern about what it will take to keep earnings growth going. Buybacks should continue unabated as long as rates stay low and with all these banks cutting rates it seems unlikely that the FOMC can raise rates any time soon despite public professions to the contrary. They are on the record that rate raises are data dependent. Well the data has not been exactly promising as of late with lagging retail sales and low wage growth.
It is the prospect of layoffs that could run counter to all these aggressive central banking efforts. Let’s face it, companies have zero loyalty to their employees and cuts can come fast and deep. Just this week already Ebay and American Express have announced over 6,000 layoffs. These are middle class jobs not easily replaced in an economy that seems to excel only in producing predominantly low pay, low benefit temp jobs.
And these announcements are likely just the very beginning of what is to come. The need to produce earnings growth overrides the need to invest in the future. Buybacks over CAPEX. Mass layoffs in favor of massively disproportionate wealth allocation for the few.
92 million Americans are now not in the labor force. European and Japanese QE programs will not likely change that. Nor do their odds seem improved by a massive rising dollar as US exports (what’s left of them) are becoming more expensive by the day:
Yes it all just doesn’t add up. But the central bankers are laughing. But increasingly one has to wonder if the sound of laughter is not the sound of madness.
We shall see. But if there were ever better conditions for a blow-off top in markets we haven’t seen them. Or maybe we have.
Categories: Market Analysis
Given that the US Congress is loathe to enact fiscal programs at the Federal level (other than the never ending bottomless pit known as “defense” spending), what is the solution?
IMO the problem is the banking system, not the CB’s. The banking system creates money out of thin air every time they make a loan. QE is NOT responsible for the US dollar losing 97 percent of its value over the past 100 years. The banking system gets credit for that. The banking system has destroyed the fiat currencies. Deflation would be the “natural” unwinding of the mess, but no one wants that. And a deflationary collapse is just a symptom anyway–it’s not a “cure”. Get rid of the source of the problem which is the banking system instead of going thru the deflationary collapse and then starting the whole ridiculous mess all over again.
What we need is a new banking system. But will the powers that be do that? I doubt it. So the CB’s try to muddle along using the only tools they have.