Friday, January 22, 2016

Central Banks Are Out Of Tricks.....DO NOT MISS THIS!

Central Banks Are Out Of Tricks

Once the power to manage expectations / perceptions 
has been lost, the central bank bag of tricks is empty.

No one knows precisely how and when the global unraveling will impact their corner of the planet, but we do know one thing with absolute certainty: central banks are out of tricks.

Like all good conjurers, the major central banks will claim that their magical powers to inflate asset valuations and inspire the animal spirits of risk, borrowing and spending are unimpaired, but this time the audience knows the truth: their magic is threadbare and their trick-bag is empty.

Obfuscation and doublespeak are primary components of central bank magic. The magic is largely semantic: if the Federal Reserve claims it can restore the economy and the stock market with reverse repos and other financial legerdemain, the corporate media is always ready to repeat this dubious claim until it is accepted as self-evident truth.

The central bank magic is fundamentally a mind-trick of managing expectations. If the Fed (or other central bank) announces a quantitative easing or market-goosing program, punters buy assets anticipating the success of the bank's program, effectively creating the very push higher the bank intended.

This rise draws in other traders, and the program is declared a success as the market generates a self-reinforcing logic: the market's response is evidence the central bank's program is a success, which then inspires more risk-on buying and further market gains.

Once a central bank program fails to generate a self-reinforcing rally, the mind-trick's power is broken. 

Once expectations of a sustained rally are crushed by the failure of the rally to achieve virtuous-cycle lift-off, the magic no longer works: once traders take a wait and see stance rather than rush to place panic-buy orders, the initial rally soon fizzles, and the expectations of effortless gain are replaced by gnawing fear of more losses.

Once expectations revert to caution, the central banks lose their power to move markets with pronouncements. 

Unfortunately for believers in the omnipotence of central banks, monetary legerdemain has little power over the real economy. Once the power to manage expectations has been lost, the central bank bag of tricks is empty.

Investment managers are warning that markets probably have further to fall as China's growth slows, oil prices plunge and central bankers lack tools to prop up economies.

The Standard & Poor's 500 Index will drop another 10 percent to 1,650 and oil could fall as low as $20 a barrel as investors flee for safety. 

Investors should sell the bounce-back rally which could come at any time. 

If we don't get a bounce soon and markets continue to plunge investors should be even more concerned.

The rout in global stocks is being fueled by investors seeking to reduce leverage as central banks run out of options to prop up economies.   A VERY KEY POINT! THINGS ARE GETTING WORSE AND THE POWERS THAT BE ARE OUT OF OPTIONS.

When you hit zero, you can't lower interest rates anymore. 

The end of the long-term debt cycle is the issue and that means that the risks are now asymmetrically skewed to the downside because risks are comparatively high and at the same time the Fed does not have the ability to ease much more if at all.

Real economies are being levered with QEs and negative interest rates to little effect at this point. Markets sense this lack of growth potential and observe recessions beginning in major emerging-market economies.

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