The final and ultimate round of the Crisis that begin in 2008 will occur when faith is lost in the Central Banks.
The entire rally in stocks post-2009 has been due to Central Bank intervention of one kind or another. Whether it be by cutting interest rates, printing money, buying bonds, or promising to do more/ verbal intervention, the Fed and others have done everything they can to push stocks higher.
As a result, today, more than 90% of market price action is based on investors perceptions of what the Central Banks will do… NOT fundamentals. For instance, if bad economic data hits the tape, the market tends to rally because investors believe this will result in the Fed having to print more money.
Again, the primary driver of stocks is no longer fundamentals, but Central Bank intervention.
There are many problems with this, not the least of which is the fact that we now know that Central Bankers will openly LIE about what they’re doing. Consider the recent revelations concerning ECB President Mario Draghi’s claim that he will do “whatever it takes” to hold the EU together.
Geithner: [T]hings deteriorated again dramatically in the summer which ultimately led to him saying in August, these things I would never write, but he off-the-cuff – he was in London at a meeting with a bunch of hedge funds and bankers. He was troubled by how direct they were in Europe, because at that point all the hedge fund community thought that Europe was coming to an end. I remember him telling me [about] this afterwards, he was just, he was alarmed by that and decided to add to his remarks, and off-the-cuff basically made a bunch of statements like ‘we’ll do whatever it takes’. Ridiculous.
Interviewer: This was just impromptu?
Geithner: Totally impromptu…. I went to see Draghi and Draghi at that point, he had no plan. He had made this sort of naked statement of this stuff. But they stumbled into it.
Here is former Secretary of the Treasury, Timothy Geithner, stating openly that Mario Draghi had “no plan” and was simply bluffing when he claimed, “we’ll do whatever it takes.”
Draghi was not only being deceptive (he didn’t have a plan); he was actually lying in the sense that the ECB couldn’t “do whatever it takes.” The OMT policy he talked about creating is in fact illegal based on EU law. He couldn’t do anything then and he can’t now.
And yet, EU stocks have rallied hard, EU sovereign bond yields have fallen, and the world has proclaimed that the EU Crisis is “over”… all based on this lie.
If you think Draghi is somehow unique in this regard amongst Central Bankers, thinking again. Recently Bank of Japan Governor Haruhiko Kuroda increased the Bank of Japan’s QE program, not because it would benefit Japan’s economy, but because doing so would make his colleagues’ forecasts better match his own.
Put simply, the folks who are supposed to be holding the financial system together have been caught openly lying and spending money just to suit their own egos. The consequences of this have not yet been felt. But the seeds of the next crisis have already been sown in these revelations.
The next time stuff hits the fan, will the world be as trusting in Central Banker proclamations? Will we continue to believe these folks are omnipotent? Or will their phony promises accomplish nothing?
We’ll find out.
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