Central Banks Are Making a Mess of Market Dynamics
It’s been a busy week for central bankers.
Scratch that…it’s been a busy six months for central bankers.
Ever since this virus blew up, they’ve had their work cut out for them. Looking for exotic new ways to ‘save’ the world economy. With each new scheme more incredulous than the last.
As markets stare down the barrel of a second wave though, things appear to be going off the deep end.
If the never-ending QE wasn’t troubling enough, now comes a flood of new measures…
More liquidity, more restrictions, more bulls#@t
Let’s start by taking a look at our hometown heroes — the RBA.
Unlike the QE bonanza we’re seeing in the US and Europe, the RBA decided on a different tack. They ploughed headfirst into the uncharted realms of yield curve control.
The way this policy works is by placing a yield cap (0.25%) on bond with maturation up to three years. What this does is influence interest rates to stay at low levels. Ensuring that cost of borrowing stays at the ridiculous lows we now have.
It certainly is an effective tool, but one might argue a little too effective.
See, Japan was the first nation to really popularise yield curve control. And it certainly fulfilled their goal of keeping interest rates low. Trouble is, now they can’t turn them around.
Despite their desperate attempts to rekindle inflation, the Bank of Japan has been powerless. An outcome that the RBA may soon find itself in.
After all, Dr Lowe was only just discussing a need to reassess their inflation targets. A sign that perhaps he has already resigned himself to Australia’s deflationary fate.
Time will tell…
Meanwhile, over in the US, the Fed has been getting heavy-handed.
Powell and co decided overnight that it’s about time banks stopped caring about shareholders. Ordering them to cap their dividends and halt share buybacks.
The decision was made after the Fed conducted several ‘stress tests’. Modelling that aims to evaluate the levels of capital of the US’ biggest banks in the face of a crisis.
Suffice to say, the answer was not good. So, in order to shore up their capital, Powell has forbidden any profit flowing to shareholders.
I don’t know about you, but that seems to have ripped any essence of ‘free market’ out of the equation.
And then there is Europe, not wanting to be outdone by the rest of course.
Despite their recent commitment to ongoing and increasing QE, the ECB is still worried about liquidity.
To remedy that, they’ve concocted up a new repurchase agreement. One that will give non-eurozone central banks the ability to borrow euros.
In other words, it’s yet another wave of cash that will flood markets. Money that sent euro stocks soaring as the news broke.
But again, one must wonder where all this money is coming from. Let alone who will foot the bill if everything goes pear-shaped.
Madness and mayhem
Suffice to say, we’re somewhat sceptical of all this central bank intervention.
It’s not that it doesn’t work, but rather that it seems to be working too well. And with no signs of it stopping anytime soon, we must wonder what it will do market dynamics.
We could be breaking a system that we have relied upon for hundreds of years.
Then again, that’s just all part of the bigger market crash roadmap. A scenario that our very own Shae Russell has outlined to a tee.
Because if the central bankers have their way, 2020 may only just be getting started. And if the first half of the year seemed rough, well the next six months could be even worse.
For The Daily Reckoning Australia