Central bank policies have been a failure - The Daily Reckoning

Central bank policies have been a failure

Mar 18, 2015

- By Bill Bonner

Bill Bonner
Gualfin, End of the Road, Argentina

Life on the ranch:

Fatima, a girl of 10, has asked to learn English. She wants to be able to talk to an aunt who lives in New York.

What an unexpected pleasure - for us, not for her - it is to give her lessons.

We'll let you know how it goes...

Back on our financial beat -

Wow! We never thought we'd have so much help from central bankers.

At the beginning of 2010, for example, we announced a "Trade of the Decade." The idea: sell Japanese bonds, which were doomed and buy Japanese stocks, which were likely to catch a break.

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In the event, the break the equity market caught came to it from the Bank of Japan...apparently more eager than ever to wreak havoc on the economy and its financial markets.

We have never seen anything like it. Well, nothing outside Zimbabwe and Argentina. There, the authorities put a gun to the economy's head and pull the trigger once every few years. But we didn't expect to see it in Japan. Or Europe. Or the USA. But in all three developed economies - the biggest three in the world - the custodians of the banking system seem Hell Bent.

Which is, of course, where they belong. Too bad they have to take us with them!

But it's going to be one wild ride. Yesterday, the Dow fell 128 points yesterday. Gold barely budged. But there is a powerful tail wind behind stocks - the hot air and hotter credit provided by the world's leading central banks. They are driving up stocks while practically guaranteeing that their nations' debt becomes worthless.

First, this report from the Wall Street Journal:

    For now, fund managers are duly piling in, following the logic of a world in which hyper-easy monetary conditions have pushed bond yields sharply lower, making stocks comparatively attractive.

    So far this year, $36 billion has flowed into European equity funds and $7.6 billion into Japanese stock funds, with $15 billion going to "international" developed-market equity funds, said fund tracker EPFR. The three categories together more than offset net outflows from U.S. and emerging-market equities, which had previously enjoyed strong gains....

    Behind these numbers are the asset-buying programs - also known as quantitative easing, or QE - instituted by the Bank of Japan and European Central Bank.

    The BOJ's purchases of both bonds and stock index-based exchange-traded funds are topping up Japan's financial system each month with an average 6.7 trillion yen, or $56 billion. And with the Government Pension Investment Fund having amended its mandate to allow equities in its $1.1 trillion portfolio, private money managers looking to deploy that money have been given an unsubtle hint on where to put it.

    The result: Tokyo's Nikkei index is up 10% since Dec. 31 to a 15-year high.

Of course, the back story is that central bank policies, which were sold to the public as a way to 'stimulate' their economies, have been a total failure. A complete washout. An unequivocal flop.

Japan limps along after 25 years of stimulation...with an economy that is not a yen larger than it was two decades ago.

Europe has some bright spots. But it has dark spots too. Put them together and you get 50 shades of dull gray...with bond yields that are perverted and sick. Together, they suggest the whole continent is being dragged down into a black hole from which it can never return. What else could happen, when governments can borrow at a rate less than zero? How will they say 'no' to citizens who want more health spending...better pensions...and a municipal pool? After all it's FREE MONEY, for pete's sake. And if they can't say 'no' to Free Money...where will the spending - and debt stop - if not at the bottom of some very dark and depressing hole somewhere?

Meanwhile, the brightest spot on the whole planet is the US economy and its unbelievably brilliant, shiny, and sparkly dollar. Heck, it's hotter than napalm. And more attractive than an unexploded grenade.

But is it something you want to play with?

Here's Bloomberg with a surprise:

    It's not only the just-released University of Michigan consumer confidence report and February retail sales on Thursday that surprised economists and investors with another dose of underwhelming news. Overall, U.S. economic data have been falling short of prognosticators' expectations by the most in six years.

    The Bloomberg ECO U.S. Surprise Index, which measures whether data beat or miss forecasts, fell to the lowest since 2009, when the nation was in the deepest recession since the Great Depression.

    This month alone, personal income and spending, manufacturing as measured by the Institute for Supply Management, auto sales, factory orders, and retail sales have all come in a bit weak.

Let's see, more than two decades of failure in Japan...

...6 years of failure in the USA (we won't mention the decades of flops and foolishness that preceded the crisis of '08)

...and in Europe, Draghi promised 'whatever it takes' to revive the economy. But whatever it took was apparently not what it got. And now it's going to get more of it. Draghi is pumping in another trillion dollars.

All over the developed world, the policies that failed are not being thrown out, they're being stepped up.

"Stooopid," we said to Fatima.

"Stoopeed," she replied.

(We recognize that our views sometimes seem contradictory. For example, we see central banks pushing up equities. But we still advise readers to get out of US stocks. Tomorrow...we attempt to explain ourselves...)

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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