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