What’s left once you’ve fired your bazooka? That’s what investors were wondering today in the wake of the European Central Bank’s “Big Reveal.”
Market Roundup
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?
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| 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 1.122Â — 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.
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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.
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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,
Mike Larson
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Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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It certainly appears that investors have finally lost confidence in the central banks. I am surprised that the market rallied after the sell off today. It looks as if we will see more selling in the next few weeks.
a sell off would be good for america. stock valuations would improve.
good news! i’ve been saying for a long time, our fed needs to raise rates to help the world’s economies with a stronger dollar, not the other way around. a rate hike in america is a rate cut for the rest of the world. this is very good news.
i’m sure that’s the signal draghi is sending to the world, especially our fed. took him awhile to figure it out. let’s hope our fed doesn’t take so long to figure it out.
we obviously have central bankers worldwide, like draghi, that are getting “on the job training.” very scary.
A rate hike in america is a rate cut for the rest of the world. hmm. Funny statement. Good news how exactly?
easy answer. the dollar is the world’s default currency, so every currency is measured against the dollar. a rate hike by the fed strengthens the dollar, so other currencies measured against the dollar immediately become proprotionally weaker. a rate hike helps our trading partners. no need for them to cut rates when we have room to raise rates.
whew! thank god we’re done with negative rates. i’m glad that didn’t last long.
it is a misnomer to call the last decade or so of international commerce “FREE Trade” especially when you have nationalized economies subsidizing the big players. It is more like “Free-for-all” trade and we are losing at this globalist scheme zs has been carefully designed by the international cabal that has been controlling worldwide economies for the past 100+ years. I would be more for FAIR trade as each nation would be represented by a reciprocating and revolving partnership based upon the old-fashioned assumption that FREE ENTERPRISE works like in days of yore. If someone builds a better mouse trap, go out and buy it. And don’t lay restrictions on the competition. Simple, isn’t it? But whoever said politics, simplicity and common sense were ever bedfellows, anyway?
I totally agree! The EU is a protectionist Cartel that favours industries and protects them from competition. They have created a lousy aligned society, where the politicians live according to other (tax)rules.
The fall of the soviet union happened due to overregulation down to the smallest details and not the least massive corruption. This is the path the EU has chosen, it will lead to the same outcome.
If the fair trade you describe is what you want — support Trump.
Sir,you are right on point!And the biggest lie about so-called “Free Trade” is that it does NOT apply to the little guy–as a resident of Michigan(Neighbors and Buddies to Canada,Eh?) and a GM retiree,it has ALWAYS galled me that big corporations can transport untold millions worth of goods across U.S.Borders tariff and tax-free under the provisions of NAFTA(Signed by Bill Clinton Democrat),but if I try to save a few paltry dollars to buy some small stupid thing in Canada I have to declare it upon return,pay whatever applicable whatever-every purchase taxed-“Free Trade” under NAFTA is yet one more huge disgusting lie rammed down the throats of the gullible American people.
Thank you Geoff!
Dan
Don’t leave out gullible Canadians and smiling Mexicans the big winners.
You can look in any direction and you see the sinners circumventing free trade. It is common here in the US that cities, counties, or whatever offer companies all kinds of subsidies (poison for free markets) to have companies use their places. That’s not just used by US entities like Scripps but also by foreigners like VW, BMW, Mercedes, and so on. Naturally companies here like tax havens like Ireland which does a lot of damage to the world economy.
Hi Mike,
Read the previous comments. It seems that no one knows what is going on.My advise is—stay liquid—reduce debt,if you have any—-DO NOT take on any more debt ,if you can avoid it.
Denis(Canada)
I totally agree. After the gold sell off in Canada, we better look out for ourselves, when it hits it’s going to be very ugly.
Yes Denis good advice. Unfortunately other Canadians are not heeding your advice.
Regarding Amazon’s latest deal with Air Transport Services Group, … Amazon and Google are the two most innovative companies around. Amazon has crushed booksellers, retailers, and will dominate the retail industry henceforth. Google will continue to dominate in their core businesses and will eventually hit home runs with their new business ventures. … Barnes and noble, FedEx, UPS, had best have a “plan B”.
our fed needs to tighten so the rest of the world’s currencies weaken. america needs to help its trading partners with a stronger dollar, even if it means america has to take a hit. our economy is strong enough to handle it.
that’s the message draghi is sending. let’s hope yellen gets it. boris schossberg, where are you. you’re a currency guy.
The Keynesian paradigm is a total and obvious failure. It doesn’t work and never has. But, we are bound to suffer from it until some other theory comes along and displaces it. I suggest Ludwig von Mises’ Austrian School paradigm that had the business cycle right 90 years ago. The Free Market i.e. Capitalism is on life support because Keynes and Harvard “economists” apparently have a vested interest in preserving and defending their failed scholarship. Amen!
Keynes got lucky. In 1919 he described the Versailles Treaty as a disaster that would result in another World War within twenty years. Everyone thought he was a genius after that one. Jim
American Monetary Act, at monetary.org;
Secret Monetary Group Warns a Catastrophe Is Coming
Harry Dent+ , March 9, 2016, on the BIS and debt money.
Even the Chinese Economic Ministry defines debt-money as THE problem;
a hard money standard has previously been a tool of the international banksters,
so the Austrian School would give them another crack at it. Private control of
government money, and war, are the enemies of economies and mankind, not necessarily what type of money we use. Locus of control declares who wields power.
As Voltaire said, find out who you are not allowed to criticize, and there you
will find your enemy.
The last time the ECB disappointed markets it caused a 6% 2 week sell off in the S&P 500.
No one seems to know that free trade must be balanced with trade surpluses and deficits equalizing over a relatively brief period. Otherwise, it becomes “beggar thy neighbor” economics by draining workers’ purchasing power, the taxation base, and multiplier impact on the GDP of the deficit country. JFK proposed an interest equalization rax to stop the loss of capital to other countries: why hasn’t a comparable labor standard of living equalization tariff been proposed to stop the loss of decent American jobs and GDP to sweatshop slave labor countries? It was done in the 1920s supposedly to stop the loss of jobs to the new Soviet Union. What is really happening is unrelenting class warfare against the producers of tangible wealth and needed services in the USA by mobilizing the Army of the Unemployed in third world countries to create obscene profits for the wealthy as the expense of everyone else. As long as the dollar is the world’s reserve currency this will continue! But the Chinese are buying all the gold they can with their hoard of dollars and eventually will put an end to the USA’s profligacy when the dollar is dethroned and could then only be used for kindling and toiletting. And you can be sure that the Chinese will never run trade deficits and will keep the yuan king! Ah so!
Your observations are sensible and common sense. I agree with you. The problem I have is that we have been hearing similar comments for twenty years from people that know a lot more about it than we do. Fiat money printing, our jobs going overseas, horrendous trade deficits, and the like, but the bad things these are supposed to cause haven’t materialized. Instead of the dollar crashing it rallies big time. By every standard measurement the economy is improving. Same goes for Europe. They are supposed to be bankrupt but continue to chug along like they always have. I guess my real question is WHEN? Jim
Its unfortunate the policy makers still have not learned they canot control the markets. They keep throwing good money after bad thinking they can shore up a ship that is sinking quickly.
Interesting that that Amazon wants to enter the air freight business. Planes new go for over a couple of hundred million dollars. Amazon also has a dozen new vans parked and haven’t moved in months near where my dog sometimes walks me. A great many businesses get in trouble trying to branch out too far, they become impossible to properly manage.
Maybe Amazon can figure a way to launch delivery drones from their 747s, as they drone over. One hour delivery – for an extra price, of course.
John Kasich, in the recent “town hall” meeting with Greta Van Susteren, was asked this very question about trade. He, like me, believes that trade creates wealth at the nation level (Adam Smith, Wealth of Nations). However, trading transactions must be on a level playing field and be pursued fairly. The episode of S. Korea dumping steel onto our market at prices below their cost is counter to the whole thesis of “free trade.” Kasich wants to keep trade FREE but FAIR. I agree completely.
Where there is a market there is someone rigging it
When the sainted Ronald Reagan agreed to larger numbers of imported Japanese cars without tariffs, they dumped their autos here at less than cost of production to take market share. I remember reading an article back then what a Pandora’s Box he had opened, and it accurately predicted the dystopic future we have now arrived in. My Dad was an auto engineer, and he said it would have been better to send the Japanese a ship full of dollars and to keep our industries intact. Good Dads are always right.
Here’s my thought experiment: Central banks create money from nowhere and massively buy corporate bonds. Regardless of what happens to the currency, the banks have enormous leverage (i.e. control) over all the businesses that have “sold their souls”.
In the post-currency wasteland, the banks control all?
At least they aren’t buying stock…
Now that Draghi has chosen the QE route, Yellen has two choices: Hold off on raising interest rates – which the U.S. markets appear to expect – or go ahead with the promised raise. The latter should result in our markets heading south, as the Dollar becomes the currency of choice for foreigners, and exporters like Boeing, Caterpillar, Deere and GE lose market share to overseas competitors. (And lay off more workers, of course). There may be one positive possibility: enough foreign money flowing into our markets in search of protection from devaluation to forestall a big drop – for awhile, at least.
I don’t think the exporters loose. They are already everywhere or can buy foreign companies on the cheap. As always, the employees are the losers.
Why does history always repeat itself-with the EU going the way of the Bank of Zimbabwe,I can’t wait for the pretty collectible 100 Trillion Euro Notes!
ECB will now loan money for up to four years interest free. Corporations will borrow gobs of money and buy back their own shares which will increase the value, and Officers of the Company will end up making millions on their options…great deal all round for the rich guys.
Will somebody please explain who is expected to borrow all this “free” money central banks are supplying to their member banks? Seems to me that the borrowers have borrowed to the hilt and cannot or will not borrow more even if paid to do so. Perhaps there are entrepreneurs out there willing to borrow at low rates to invest in the falling commodity markets?
Very good.
I have so much stuff that I do not know where to put it besides donating it. Why would I want to buy more?
Entrepreneurs don’t need to borrow. They crowd fund or get venture capital from the rich gamblers.
John B read samm’s comment above yours therein lies the answer
Everyone seems to think that the Euro will crash and burn, yet the fact is here we are after yet another round of EU QE and where does the Euro go? UP again! Could it be that we are all fooling ourselves and that the ECB is actually smart enough (in appearing to fire their Bazooka backwards) while they are actually implementing more and more QE, but at the same time fooling the US to remain on course to interest interest rates, there-by actually helping the EU instead of igniting a currency war? This kind of reminds me of how Martial Arts uses the power and momentum of their enemy against them.
Just as BOJ and the ECB have followed in the footpath of their stated intentions, I expect the Fed will on 16 March follow in the footpath of their stated intentions to raise rates. Why? In order that together they can all demonstrate that:
WE ARE IN CONTROL.
And like the markets in Japan and the ECB, the US markets will scream in response:
NO YOU ARE NOT.
Re SAMM comment:
Best explanation ever, however American politicians, bankers and corporations did the very same thing here years ago with 4 TRILLION dollars!
They are just following in our footsteps.
When the crash comes they will be able to afford real food while we try to figure out how to make bread from dry cat/dog food.
Clinton is going to bomb Iran has soon has she is elected just what we want she is bonkers.
Dragy wants to print the eu to the moon and negative interest rates you could not make this up?
Unfortunately there is going to be a war, we are run by physiopaths.
The statement on Clinton going to bomb Iran is absolutely not true. The Republicans are the warmongers. Trump will do what he always does, insult, sue. Clinton and Obama did more to reduce the tensions between Iran and the United States than the Republicans ever did. Our Country is now enjoying low cost oil and gasoline that is improving the economy and creating jobs. Iran is changing too. They are moving ever so slowly to a more modern society with more control by the people. With the sanctions gone, the leaders can no longer blame the west for Iran’s problems.
May be you hire a proof reader. Your comment is just to confusing and full of errors, technical as well as factual.
As usual Amazon wants to control EVERYTHING and that is a big mistake.Deliveries should be left to the experts.Last month some socks I ordered were supposed to be delivered in two days.They used their own people and it took 9 days to get the socks.I cancelled Amazon Prime” the same day I got the socks.
The global economies are at a point that happened a few times over the millennia. A paradigm shift is under way that no politician really wants to speak about. Most economists do not even consider this shift or they also do not want to speak about it.
We permanently witness productivity increases. That happened all the time but these increases lead to new fields of activity.
This time the difference is that we have productivity gains coming from ever more sophisticated machines and from robots. The machines do not look for salary increases or trips to everywhere. So the capital owners want to keep all the money from the gains and leave the general population poorer and poorer. Poorer people cannot buy anything, no matter how cheap the money is. We need a completely new economic and social system that takes all the developments into account and makes sure we all can live a happy life. That might be paradise. We just have to accept that nothing will be any more what it was. Imagine greed as a motor for economic activity will be useless because we have everything – we could then switch to developing our brains and good emotions.
Michael,
Oh, no doubt, the central banks are on their last legs and boxed in!! When you have negative interest rates and some countries now ready to mail checks to people to get them to spend, its over! We have massive, massive demographics imbalances, which is just one of at least a dozen major canaries in the coal mine! The next wave down for the capital markets will be here by April timeframe…All cyclical indicators are pointing at this.