Friday, February 19, 2016

Another Central Bank Mirage..........

Another Central Bank Mirage

Over the weekend, the following happened: China's exports and imports fell by 11.2% and 18.8%, respectively, numbers which, for a trading power, are nothing short of apocalyptic. Japan's Q4 GDP shrank at an annualized rate of 1.4% which, for a country that had spent the previous three years borrowing and printing record amounts of new currency, is an extraordinary admission of failure. And US allies Turkey and Saudi Arabia appeared to be invading Syria, putting them — and by implication the US — in direct confrontation with Russia.

This combination of disturbing trends and events would, you'd think, produce a dark and chaotic opening for Monday's global financial markets. But you'd be wrong, because while the above was going on, Mario Draghi, head of the European Central Bank announced that he "will not hesitate to act" to keep the past month's instability from spreading. And traders responded the way they've been trained to, with panic buying of pretty much every dicey financial asset and panic selling of safe havens like gold, Treasury bonds and euros.

This came after previous attempts by central banks — including China's yuan devaluation and Japan's foray into negative interest rates — failed to get the markets' juices flowing.

Based on past experience, the pop might endure for another few days or even weeks. But then the abject failure of recent central bank experiments will once again start to color perceptions. To take just a couple of examples: Four years after Draghi's "whatever it takes" boast, Italy, as previously mentioned, is imploding and Deutsche Bank, Germany's dominant financial institution, is releasing a drumbeat of bad/ominous news including escalating losses, massive lay-offs and flat-lining divisions. It is now being mentioned in the same breath as Lehman Brothers.

Japan, meanwhile, offers a useful clue about the effectiveness of whatever the ECB and for that matter the Fed might try next. The money it has pumped into the economy, as measured by central bank assets — the bonds and stocks it has bought with newly-created yen — rose from 25% of GDP in 2007 to nearly 80% today. But the Japanese economy has gone exactly nowhere.

In short, the limits of this kind of monetary policy are now visible for all to see. Despite differing levels of ease, all the major economies are performing pretty much the same way, with slow to slightly-negative growth, steadily increasing debt, and spiking asset price volatility. More QE is unlikely to change that.

So…what next? Probably a brief respite from "risk-off" followed by the resumption of turmoil (financial, geopolitical or both).

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