What's new about the central banks' action? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 1 December 2011
PRINTER FRIENDLY | ARCHIVES
What's new about the central banks' action? A  A  A

Baltimore, Maryland

Whoa! The Dow rose almost 500 points yesterday. Whoopee! Hallelujah!

It was like the Second Coming on Wall Street. As if He walked across the East River...and announced it Himself:

"The fix is in."

But it was not the sacred that spoke yesterday. It was the profane. The world's central banks, to be precise. The got together. More like a meeting of mobsters than a gathering of the gods. They made it clear.

You want money? You want cash? You want something you can take to the bank? Well, you've got it!

Move by central banks exhilarates Wall Street
DANIEL WAGNER
AP Business Writer

A move by the world's central banks to lower the cost of borrowing exhilarated investors Wednesday, sending the Dow Jones industrial average soaring 490 points and easing fears of a global credit crisis similar to the one that followed the 2008 collapse of Lehman Brothers.


It was the Dow's biggest gain since March 2009.

Large U.S. banks were among the top performers, jumping as much as 7 percent. Markets in Europe surged, too, with Germany's DAX index climbing 5 percent. "The central banks of the world have resolved that there will not be a liquidity shortage," said David Kotok, chairman and chief investment officer of Cumberland Advisors. "And they have learned their lessons from 2008. They don't want to take small steps and do anything incrementally, but make a big bold move that is credible."

Wednesday's action by the banks of Europe, the U.S., Britain, Canada, Japan and Switzerland represented an extraordinary coordinated effort.

But amid the market's excitement, many doubts loomed. Some analysts cautioned that the banks' move did nothing to provide a permanent fix to the problems facing heavily indebted European nations such as Italy and Greece. It only buys time for political leaders.

"It is a short-term solution," said Jack Ablin, chief investment officer at Harris Private Bank. "The bottom line on any central bank action is that it papers over the problems, buys time and in some respects takes pressure from politicians. ... If nothing's done in a week, this market gain will disappear."

Banks stocks soared as fears about an imminent disaster in the European financial system ebbed.

American and European banks are connected by contracts, loans and other financial entanglements, meaning that a European financial crisis would punish U.S. bank stocks. The brighter outlook that emerged Wednesday relieved some investor concerns.

JPMorgan Chase & Co. jumped 7.7 percent, the most of the 30 Dow components. Morgan Stanley rose 10 percent and Citigroup Inc. 8.2 percent.

But wait.

What has really happened? The central bankers have given out the word that they'll print up as much money as necessary. So what's new? Haven't they been doing that all along? What is lending at zero interest rate? What is buying the government's debt? What is taking the toxic bonds off the banks and brokerage houses?

What is really new? Not much.

You remember our advice, dear reader? Sell stocks on rallies. Well...what are you waiting for?

And if we were speculators we'd be selling stocks...even stocks we didn't own. Because we have here an opportunity. The market is rising on hope, not on reality. And today, it might rise a bit more...

...until it finally realizes that there is no really good reason to be so bullish.

Stocks are bits of businesses. And businesses do not make more money just because the central banks print money. If this were not so, a few years ago, Zimbabwe's companies would have been the most profitable on earth. Under the leadership of Gideon Gono, the central bank of Zimbabwe was printing up trillion-dollar notes and handing them out all over town. Trouble was, you couldn't even buy a cup of coffee with them. In fact, you couldn't buy a cup of coffee anyway...the whole economy was in such disarray nobody could get any coffee. Or anything else.

That was at the end. At the beginning money printing works miracles.

But businesses do not operate in the realm of the mysterious or the sacred. They are remarkably down-to-earth undertakings. They're real enterprises with real revenues and real expenses. They make money by selling goods and services. And, taken all together, they only make as much money as the economy itself allows. In other words, it's not possible for all the businesses to do better than the economy that supports them.

So, now we can ask you a question: will the economies of the world's countries do better, now that the central banks have announced they will print more money?

Or will they do worse?

It's hard to say. But by our reckoning, the world is in the grip of a major correction. Among the things the correction is likely to correct is the money system...in which central banks have the power to create "money" out of thin air.

Would the correction correct something that didn't need correction? If central bankers refused to print money there would be no need to correct them, would there? So this latest announcement just confirms what we thought all along.

Printing money is easier than raising taxes. It is also easier than borrowing...especially when lenders get wary. All that stands in the way is the integrity of the central bankers themselves. Looks like that just gave way....

---------------- Revised And Updated Edition Of "Multibagger Stock Ideas" ----------------

You are only a step away from getting your hands on to this exclusive 16 page stock market report by Equitymaster - Multibagger Stock Ideas.

To claim your Free copy of this report, all you need to do is reconfirm your FREE subscription to our daily e-letter, The 5 Minute WrapUp.

Quick! Sign Up Now! Click here...

-----------------------------------------------------------------------------------------------------------

*** Is the Great Correction still underway? Yes it is! The Wall Street Journal reports:

Consumers continued to cut debt levels in the third quarter, largely as they pulled back from the housing market again, the Federal Reserve Bank of New York reported Monday.

For the most recent quarter, overall debt loads for households fell 0.6% from the prior quarter, for a drop of around $60 billion to $11.66 trillion. The bank said mortgage balances recorded on consumer credit reports fell by 1.3%, or $114 billion, while home equity lines increase by 2.3%. The retreat in mortgage borrowings was the primary driver of the overall drop in consumer borrowing.

*** Hey, wait. If the central bankers are printing money, why should consumers continue to cut back?

Ah...glad you asked. The central banks are bailing out speculators, bankers, and the feds...not households. The money only reluctantly gets to the consumer level...or not at all.

Instead, the rich get richer...courtesy of a corrupt money system. They get bailed out of their mistakes...and handed a lot of money they don't deserve.

And the poor? Do they get richer simply because the central banks coddle bondholders? Do the bondholders set up factories and provide middle-skill jobs? Do the speculators invent new industries? Do the insiders set up small businesses and build companies that create new wealth?

Don't make us laugh, dear reader.

*** No...the system just becomes more corrupt...and more zombified. Here are the insiders at work...the people the central bankers are trying to help. Bloomberg has the story:
By Richard Teitelbaum

Nov. 29 (Bloomberg) -- Treasury Secretary Henry Paulson stepped off the elevator into the Third Avenue offices of hedge fund Eton Park Capital Management LP in Manhattan. It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase & Co.

Now, amid tumbling home prices and near-record foreclosures, attention was focused on a new source of contagion: Fannie Mae and Freddie Mac, which together had more than $5 trillion in mortgage-backed securities and other debt outstanding, Bloomberg Markets reports in its January issue.

Paulson had been pushing a plan in Congress to open lines of credit to the two struggling firms and to grant authority for the Treasury Department to buy equity in them. Yet he had told reporters on July 13 that the firms must remain shareholder owned and had testified at a Senate hearing two days later that giving the government new power to intervene made actual intervention improbable.

"If you have a bazooka, and people know you have it, you're not likely to take it out," he said.

On the morning of July 21, before the Eton Park meeting, Paulson had spoken to New York Times reporters and editors, according to his Treasury Department schedule. A Times article the next day said the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie's books and cited Paulson as saying he expected their examination would give a signal of confidence to the markets.

A Different Message

At the Eton Park meeting, he sent a different message, according to a fund manager who attended. Over sandwiches and pasta salad, he delivered that information to a group of men capable of profiting from any disclosure.

Around the conference room table were a dozen or so hedge- fund managers and other Wall Street executives -- at least five of them alumni of Goldman Sachs Group Inc., of which Paulson was chief executive officer and chairman from 1999 to 2006. In addition to Eton Park founder Eric Mindich, they included such boldface names as Lone Pine Capital LLC founder Stephen Mandel, Dinakar Singh of TPG-Axon Capital Management LP and Daniel Och of Och-Ziff Capital Management Group LLC.

After a perfunctory discussion of the market turmoil, the fund manager says, the discussion turned to Fannie Mae and Freddie Mac. Paulson said he had erred by not punishing Bear Stearns shareholders more severely. The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into "conservatorship" -- a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets.

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.

The fund manager says he was shocked that Paulson would furnish such specific information -- to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information...

Revelations about the meeting come at a sensitive time.

"The optics are awful; there's no doubt about it," says professor Larry Ribstein of the University of Illinois College of Law in Champaign. "Everyone knows that insider trading is a huge issue."

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.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "What's new about the central banks' action?". Click here!

1 Responses to "What's new about the central banks' action?"

Hasit Hemani

Dec 1, 2011


All the stock markets world over are fortified and sustained by operators. That's nothing but insider trading obliquely, if not technically.

Like 
  
Equitymaster requests your view! Post a comment on "What's new about the central banks' action?". Click here!

Recent Articles:
Will They Haul Off Trump's Statue, Too?
August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Farm Loan Waivers: Why Bad Economics Makes for Good Politics
August 14, 2017
It is because the negative effects of the waivers aren't clearly visible.
The Most Important Innovation in Finance Since Gold Coins
August 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
The Most Profitable Investment in the History of the World
August 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'