Central Banks : What Are They Not Telling Us ?
This post was written a week ago for www.hnworth.com, a site targeting high net worth individuals in Singapore.
Have fun reading…
After 18 years in the markets and a few crises along the way, one comes to realise some hard truths about markets and central banks, and that they are held hostages by their respective agendas. Markets are simple, just mechanisms that operate solely on human greed and central banks or regulators are bound to keep market order.
Such is the commitment of the central banks that since 2009, the Fed started to use forward guidance as a policy tool, to forewarn markets of their intentions months before acting, giving the markets ample time to “price-in” the moves.
This is because central banks all have one thing in common, they are compelled to naturally assume the role of the ultimate economic cheerleader and cannot be seen to disrupt order or risk an Armageddon of sorts in a loss of confidence for them to admit that their policies are inefficient which, besides puts their careers and personal credibility in jeopardy, would end in political repercussions that carry consequences quite unimaginable.
The FOMC decision not to hike the lowest interest rates in history after 75 months of economic growth, after the worst recession since World War II, has been hailed by the media as the right decision even though expectations were running high for a rate hike after their last meeting in July, the expectations fizzled into September when the S&P 500 saw their worst monthly return since May 2012 and the worst August return since 1998, I believe.
Admitting this time that it was due to China and other global pressures, however, when things are looking quite rosy in the US is akin to ceding their economic supremacy to global forces i.e. China. They tried to pass off housing and other concerns but as we can see from economic data, the main negatives are coming from the business cycle.
To me, they are not telling us something.
Major central banks around the world keep harping on how things need to get better but global GDP has not stopped growing since 2009.
Inflation is off 2009 lows albeit that it is slowing and global unemployment has not been lower since 2008.
There has been nearly 697 global rate cuts since the last Fed hike back in 2006, according to BofA and stock markets have performed admirably in the past 6 years.
Nearly 14 trillion in QE assets held by major central banks that have pumped nearly US$ 10 trillion in QE monies while keeping a ZIRP (zero interest rate policy) and corporate income has stopped growing for the S&P 500.
Commodity prices, particularly industrial commodities such as oil and basic metals, which used to buffer and make up for the inefficiencies of the former global growth engines, the emerging market economies, have deflated leaving these budding economies with little prospects, riddled as they were over the years from the effects of corruption and exploitative governments.
The only short term weapon central bankers have left in their pockets which is currency war where weakening the currency is an almost immediate boost to GDP (in local dollars), all things status quo unless other central banks do the same. That happened earlier this year when the Swiss National Bank, certainly almost because they were fed up of the ECB, decided to unpeg their currency from the EUR before the ECB started their Q€ program.