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Business/Finance See other Business/Finance Articles Title: Will Latest Central Banker Blitz Work … When All Others Failed? Will Latest Central Banker Blitz Work … When All Others Failed? Mike Larson | Friday, October 23, 2015 at 4:22 pm Central bankers are blitzing the markets with all they have! It started yesterday when European Central Bank President Mario Draghi and his pals didn’t cut rates, but DID strongly hint they would act later this year. Among the options he put on the table: An extension of Euro-QE beyond its current expiration date of September 2016 … an expansion of the type and quantity of bonds the ECB will buy … or even a cut in interest rates deeper into negative territory. The bank’s deposit rate is currently minus-0.2%. That caused the euro to plunge by two full cents against the U.S. dollar. It also lit a fire under the Dow Industrials — even as junk bonds barely budged, oil was basically unchanged, the Russell 2000 badly lagged and many key financial and health-care stocks languished. The Bank of China’s interest-rate cut helped ignite an early stock market rally. Then this morning, the People’s Bank of China added fuel to the fire. Specifically, the PBOC cut its one-year lending and one-year deposit rates by 25 basis points. It also cut the bank reserve requirement ratio by 50 basis points, theoretically freeing up banks to do more lending. That ignited another rally in stock futures. So does this mean happy days are here again, and that asset prices will climb into the clouds? Is my call for an overall weakening trend in stocks, interspersed with very sharp, short-term bear market rallies, off base? First, you have to ask why the ECB is taking even more steps just six months or so after it launched Euro-QE. The answer is pretty obvious: Because the program was an abject failure! It didn’t boost European growth, nor did it boost European inflation, with prices falling 0.1% in September. Second, you have to ask how a further dollar rise would be positive. The surging dollar has helped crush revenue and profit at a wide swath of U.S. multinationals, not to mention put downward pressure on commodities and resource stocks. So any additional gains driven by a new round of euro depreciation will only make a bad problem worse. “So does this mean happy days are here again?” Third, this is China’s sixth interest-rate cut since November. None of the previous ones worked, obviously, as the economy just grew at a rate of 6.9% in the third quarter. That was the slowest “official” growth rate since the Great Recession year of 2009, and the real GDP gains are undoubtedly much lower once you strip out the statistical fudging China is well-known for. Fourth, markets have come a long way in a short period of time … but simultaneously haven’t accomplished much at all. Consider: While the Dow Industrials have jumped 1,600 points in just a couple of weeks, they’re only back to where they were in August. If that’s all we can get out of a huge round of global policy easing, what does that say about the underlying problems facing markets and the economy overall? Finally, every previous round of easing in the early and middle stages of the bull market prompted huge rallies in everything. This time around, we’re seeing huge divergences by asset class, sector, currency, and economy. That only serves to underscore the paradigm shift I’ve highlighted — that the law of diminishing returns is a major, new challenge for investors. So sure, we’ve rallied more than I expected in the short term. And there are a small handful of stocks out there I still like, as I mentioned the other day. But I seriously doubt that another round of the same medicine that repeatedly failed in the past will push an incredibly old, divergent, and fundamentally challenged market back into bull territory. Now, let me hand you the floor. Do you think the latest moves by the ECB and PBOC are game changers? Or are they just more of the same kinds of actions that haven’t worked in the past? Do you think this is an oversold rally, or the start of a move to new all-time highs in the indices? Are the problems in China worse or better than generally assumed, and what does that mean for the stock market outlook? Here’s the Money and Markets website link — put it to good use this weekend and I’ll do my best to address your comments on Monday. Post Comment Private Reply Ignore Thread Top • Page Up • Full Thread • Page Down • Bottom/Latest
#1. To: BTP Holdings (#0)
If anyone here is in equities, please raise your hand and duck your head. Thanks. “The most dangerous man to any government is the man who is able to think things out... without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, intolerable.” ~ H. L. Mencken
Nope, commodities is my thing. ;) "When bad men combine, the good must associate; else they will fall, one by one." Edmund Burke
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