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I think the collapse has started. When I came home from grocery shopping I found this email in my box 🙂
By Mike Larson
Boy, are things heating up on the central bank front!
Earlier today, the Bank of Canada came out and shocked the market by cutting its benchmark interest rate 25 basis points to 0.75 percent. Not a signal economist predicted the move, which was its first cut since April 2009 during the depths of the Great Recession.
The BOC said it was buying “insurance” against risk — namely the fact that “the oil price shock increases both downside risks to the inflation profile and financial stability risks.” Canada is the biggest oil exporter among the Group of Seven nations, and policymakers are clearly worried the drop in prices from $108 a barrel to $45 could hammer its commodity-levered economy. The rate cut sent the Canadian dollar to a fresh six-year low against the greenback.
BOC policymakers are worried the drop in oil prices could hurt its commodity-levered economy.
Around the same time we were learning of that move, news leaked about what the European Central Bank is planning to do tomorrow. Both Dow Jones and Bloomberg reported that the ECB could launch a 50 billion-euro-per-month QE program.
That would run around an annual pace of 600 billion euros, or just shy of $700 billion at recent exchange rates. The news led to big intraday fluctuations in the euro, but traders appear to be unwilling to drive the currency dramatically higher or lower until they get more details.
Of course, these moves follow by just a few days the decision by the Swiss National Bank to abandon its currency peg with the euro. That led to the biggest rally in the Swiss franc on record, and caused billions of dollars of losses throughout the shocked currency market. And they come on the heels of a separate move by Denmark’s central bank on Monday to cut interest rates further into negative territory — to negative-0.2 percent from negative-0.05 percent.
So what the blazes is going on? Why are we seeing so many moves by so many foreign central banks?
I believe they’re worried sick about their economies, and the risk of domestic deflation and recession! While the U.S. economy has been holding in fairly well, despite some challenges, the euro-zone economy has been much sicker. That has infected close trading partners that use their own currencies, including Denmark and Switzerland.
At the same time, as the BOC noted, the collapse in crude oil prices has hit Canada’s financial markets and economy harder than other countries. So it felt it had to act in an attempt to stabilize things.
How will everything sort out? And what does all this central bank activism mean for your investments?
Well, we have been a primary beneficiary of all the monetary activism in foreign markets for several months now. Our currency, our stocks, and our bonds have risen in value because all that easy money has flowed here.
So I’ve pretty much jumped off the incredibly crowded dollar bandwagon for now. I’m also putting more time and effort into evaluating beaten-down energy and materials stocks, which could hold incredible value and potential here.At the same time, you can make a very compelling case (as I have in the past couple of weeks) that these moves are getting very extended. That’s particularly true in our bonds and our currency. That makes the dollar vulnerable to a potentially major reversal — especially if the markets start to shift toward the view that all of these foreign stimulus actions will actually bolster their economic performance vis-à-vis ours!