Big Little Lies by Central Bankers

How stupid do central bankers think we are? By account of their communications and actions the answer is: Very.

Just in the past 24 hours we got a heap of communications that can be considered cringeworthy at best, highly disingenuous more likely. But it all fits with a script that has been unfolding for years.

After all central bank intervention was supposed to be an emergency driven policy to re-inflate a global economy and help financial institutions at the brink of collapse back to solvency and health.

The big little lie: Central banks would nurse economies back to health and then normalize their policies and unwind their balance sheets. Truth: It’s never going to happen.

After the initial shocks and recovery every attempt to remove stimulus was met with renewed intervention following stock market instability. The final hurrah came in February 2016 when global markets corrected for the last time. Since then global stock markets have not only recovered but have set one record after another, in fact stocks now only go up as economic growth is celebrated as a global ‘Coordinated Global Economic Recovery’.

Let’s be honest here. If you had shown this global stock chart below to anyone in 2009 nobody in their wildest dreams would have predicted central banks would still be intervening every single day:

Nor would they have envisioned this to be the corresponding ongoing interest rate policy of the ECB:

Any change in sight?


Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases.

Regarding non-standard monetary policy measures, we confirm that our net asset purchases, at the new monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase the asset purchase programme (APP) in terms of size and/or duration.

Translating Draghi into plain English: We will never raise rates, we will ever not intervene. At the first sight of trouble we will expand QE.

Hiding behind their inflation target central bankers such as Draghi keep extending a crisis program distorting markets into ever obscene proportions. Indeed, Draghi made his interest policy perfectly clear in the Q&A: “I see very few chances at all that interest rates could be raised this year“. He will never raise rates. His term expires when?  31 October 2019.

German unemployment may be at all time lows, industrial production at all time highs and growth figures being “robust” but not a single sign of raising the ECB rate or stopping QE. Full crisis mode because that’s what a deposit rate of -0.4% is. Panic mode. The new normal.

But Draghi is not the only peddling big little lies.

Just a few hours later the intervention voices in Japan:

Most Members Shared View It Was Appropriate For BoJ To Persistently Pursue Powerful Monetary Easing


“With regard to asset purchases other than JGB purchases, members shared the recognition that it was appropriate for the Bank to implement the following guideline for the intermeeting period. First, it would purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding would increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively. Second, as for CP and corporate bonds, it would maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.”

Then this whopper:

Right, no influence whatsoever:

Truth: Buying stocks is a big profitable business. It’s no coincidence that one of the most aggressive buyers of US stocks has been the SNB owning over $90B in US stocks. Their $800B+ portfolio has yielded a massive $55B in profit in 2017.

So what’s the underlying truth here?

Firstly understand that the concept of a returning to normal is off the table. Central banks will never stop intervening in one form of another.

The underlying truth: Global economic growth is highly intertwined with global equity prices. Stock prices are not a reflection of strong growth any longer they actually produce it.

Here’s Goldman Sachs:

“higher equity prices are currently boosting GDP growth by nearly +0.6pp, and account for about two thirds of the +1pp growth impulse from overall financial conditions. The stock market currently thus accounts for nearly two-thirds of the total +1pp growth impulse from financial conditions”.

In other words: If stock prices stop rising so will economic growth:

“Our base case is that the equity impulse to growth decelerates to +0.3pp by Q4 as equity price gains slow”

You know where this is going: A DECLINE in asset prices would slow growth to a halt and impact growth negatively. Here’s Goldman’s take on the impact of a 20% decline in equity prices:

“we estimate that the growth impulse from equity prices turns from a +0.6pp boost currently to a -0.5pp drag by early 2019 on a 4QMA basis” “We conclude that the recent run-up in equity values is a key contributor to current strong growth, and that sharp stock market moves represent an important two-sided risk to our constructive near-term growth forecast”.

And there you have it. The tail is wagging the dog.

In a world drowning in debt central bankers can’t ill afford a slow down in ascending stock prices otherwise economic growth slows. And if this is true they can’t afford declines in stock prices which would go a long way to explain this chart:

$FTSE All World Index

But no central banker will ever admit it.

Instead they will keep telling big little lies about imaginary inflation targets and keep policies at crisis levels. Because this is what it takes.

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