Posted by: Dr Pano Kroko Churchill | June 27, 2016

Market Panic Moves Central Banks … hopefully … Towards Inaction

BREXIT is good.

BREXIT is great.

BREXIT is scary for little investors.

Yet BREXIT is the unique opportunity for those Investors who know what they are doing — to make a shitload of money.

Just watch…

Today as global markets reel for a second day after the establishment-rattling vote by Britain to sever ties with Europe, investors are again expecting central banks to ride to the rescue.

And that may be the problem.

Or so believe a number of investors and economists who worry that another round of central bank intervention in the markets will compound the sense of alienation, frustration and anger at global elites that encouraged a majority of Britons to opt for leaving the European Union.

Traditionally, market participants have tended to cheer central bank activism.

In times of financial panic, wholesale bond buying, negative interest rates and disbursing cash directly to consumers (the yet-to-be-deployed weapon in the central banker’s armory) have been seen as easy policy substitutes for governments unwilling or incapable of taking action themselves.

But, as the world’s leading central bankers finished a weekend of brainstorming in Basel, Switzerland, as to what their next move might be, some feared that this time around they might do more harm than good.

Silly people say that central bankers have not done enough, but they have done too much already…

Global central bankers had already planned to convene at the annual meeting of the Bank for International Settlements, a clearinghouse and research shop that provides a private forum for central bankers to gather and exchange views.

Because the British referendum BREXIT win and the sharply unexpected vote results along with the sharp fall in the markets that followed, has brought an extra urgency to the two-day meeting of Central Bankers, we see fear in the wings..

The head of Mexico’s central bank and chairman of the bank’s policy group that monitors the global financial system, said that committee members had “endorsed the contingency measures put in place by the Bank of England and emphasized the preparedness of central banks to support the proper functioning of financial markets.”

Adding to global political tensions were parliamentary elections on Sunday in Spain, where the anti-austerity left-wing party Podemos as expected, continued its recent run of electoral success and became the king maker after this election.

And while the sell-off in stocks on Friday was very sharp, market participants said over the weekend that they were heartened that major market makers were able to absorb the selling fairly well. Monday morning was not a major blood bath but just a kiddie pool full of blood…

Playing a central role were exchange-traded funds, which at one point on Friday accounted for close to 50 percent of overall trading volume in stocks, also played a pivotal role this Monday. And that is an extraordinary statistic, given that the funds were largely unknown a decade ago as an investment option for investors.

The ability for investors to quickly and successfully buy and sell stocks and bonds, the crucial advantage that exchange-traded funds have over mutual funds, is seen by central bankers and financial regulators as critical, in times of acute financial stress.

Part of the conundrum for central bankers is that the recent sell-off is not the result of an event like Lehman Brothers going bankrupt in September 2008, which provided authorities with an unassailable excuse to intervene. Lehman’s failure caused markets to seize up and financial institutions to stop dealing with each other.

But when the crises that rock global finance are social and political, it becomes more awkward for central bankers to defend any form of extraordinary intervention.

And that is what worries analysts, who for some time now have been concerned that interventions by central banks were distorting markets by making them less liquid and creating anomalies such as what currently exists in Japan.

There, the nation’s central bank owns 34 percent of the country’s government bonds and is one of the top 10 shareholders in 90 percent of the companies listed on the stock exchange, according to data from Bloomberg.

Central banks have done everything to jury-rig markets. And they still get their jollies out of interfering like crazy… So what makes us think they won’t want to do more now is the key question.

And if they choose to do more of their freak thing — then it’s up to us to determine which way they will tilt the table and which way they will skew the game?

And the thing is that the Central Bankers are wankers par excellence and they  themselves don’t know which way the game will tilt, and if they will succumb to the laws of unintended consequences… that always get triggered from their “innocent” intervention.

The notion that the extraordinary central bank interventions of recent years were designed to stamp out deflationary threats and spark an increase in prices and economic activity in stagnant economies in Europe and Japan, is complete nonsense.

Because for one, we have plenty of inflation, it’s just asset price inflation and you can see that based on the elevated equity, bond and housing markets that have been one major consequence of these policies.

People can’t afford to live in cities anymore, and they are grumpy about their jobs.

Asset bubbles are everywhere you look.

And they are all hissing and popping threatening to blow up the whole lot. And when they blow they will make the Fourth of July explosions day look like a joke — in comparison.

In Great Britain, this dynamic has been particularly acute. Thanks to aggressive central bank policies, house prices in London are among the most expensive in the world, yet the inflation-adjusted weekly average wage of 470 pounds, or about $632, is still £20 lower than it was before the financial crisis, according to the economic results of all major British research organizations and of the Bank of England

Interestingly, one of the most vocal critics of central bank overreach has been the Bank for International Settlements itself.

For years now, senior economists at its research arm, have been arguing via speeches and papers that artificially low interest rates have created pernicious asset bubbles in equity and housing markets in the developed world and debt frenzies in emerging markets like China and Brazil.

These views were highlighted again on Sunday in Basel with the presentation of the bank’s annual report.

In a speech, the bank’s managing director, said that extremely low interest rates were a threat to global financial stability as they “depress risk premia and stretch asset valuations.”

The result, the bank’s managing director contended, was the threat of a “loss of confidence in policy making” and “unrealistic expectations about growth and the ability of present policies to lift global growth.”

While couched in platitudes, the bank’s managing director message was clear enough. Persistent central bank interventions have not only created dangerous distortions, they have added to a sense of worldwide cynicism that these measures have not accomplished their central aims: lifting economic growth and increasing wages.

It is worth noting that the bank’s managing director is familiar with asset bubbles: He was the head of Spain’s central bank a decade ago when reckless lending among the country’s financial institutions resulted in a boom and eventual bust of Spanish property prices.

But central bankers today will have a harder time justifying an intervention when the markets are going haywire because of a Democratic election upsetting result somewhere around the Globe. Even though this happened in the country that has at it’s capital the world’s biggest financial center — the City’s square mile…

And I surely hope they don’t act now and stay calm unlike the drama adled lemmings out there… Of course, bashing central bankers is always a popular and easy pastime for politicians, economists and investors alike, and I don’t plant to indulge in that exercise but only in a cautionary tale for the wise ones, because it is also true that central bankers in Britain, Europe, Japan and the United States have consistently said that their actions have been forced by the unwillingness of politicians and governments to act themselves.

And in that they have a good point.

So let’s talk and sort this out without interference to the Markets, so that we allow Capitalism to take it’s course.

Cheers.

Yours,

Dr Churchill

PS:

The thing is that monetary policy cannot go it alone.

People have been left behind, which is creating anti-establishment sentiment in just about every democracy in the world. You would think that at some point governments would get the message.

And we speak for those of Investors who are really making a killing in this Market riding roughshod over the herd of the fearful lemmings getting killed on the Street. You see the problem with the lemmings is that they don’t now how to stay put…

The moment these lemmings peek out from their hole, and start running to make their stock market moves because of the News — they get picked off by the sharp shooters. One after another and sometimes en masse. That’s why we have News. To scare the living daylights out of the scardy cats and get them to expose themselves.

And off they go…

Another reason to celebrate this culling of the pack of stupid, is that they are wasting precious resources of the market, and take up too much space. All those small minded nincompoops that didn’t get the memo that the only Investors to win the game are the long term value Investors — are now duly creamed. Sadly as always, they make moves in desperation and are liquidated on margins and on calls.

In a Darwinian way the playing field is gleaned off the corpses of the ants…

I know this sounds very much like Ayn Rand and I don’t like it, but in a way it’s just deserts, because the thinning of the herd of Tourists, allows the more seasoned people to do what’s right.

And that is to bring back Common Sense to the Wall Street and the City, after all the Drama and Sentiment has been duly discounted, and to send a clear message to the governments to not interfere because in a Democratic Capitalist Society — Markets Go Up and Markets Go Down and there is no REASON to interfere with this movement, unless You want to bust up the Treasury and send everyone to the poorhouse to eat a bowl of “nothing” along with the deadbeats.

Last time I checked that was Socialism… and we have the BREXIT to teach us this lesson all over again.

Isn’t BREXIT great?

Enjoy the game….

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