Tuesday, 5 June 2012

Ignore the Rumors… Central Banks Are Pulling Back… Guess What Comes Next?

Talk of QE and rumors of coming Central Bank Intervention pushed stocks and Gold higher on Monday. It’s odd to hear these rumors when every major Central Bank has in fact been clearly stating NO new stimulus is coming any time soon.
Indeed, as the Fed has proved now for eight consecutive FOMC meetings, it is not going to announce more QE unless another systemic Crisis erupts. Instead the Fed continues to reiterate its talk of maintaining low interest rates, which is largely a symbolic gesture as it changes nothing
From the April 27 FOMC minutes
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Bank of Japan is joining this strategy of pulling back on its liquidity measures…
BOJ eased to ensure recovery, won’t act “automatically”
Bank of Japan policymakers agreed to ease monetary policy in April to ensure the economy resumes a recovery, but signaled a pause by complaining of “misunderstanding” in markets that they will keep offering monetary stimulus automatically until 1 percent inflation was in sight, minutes of the meeting showed.
At the April 27 meeting, the BOJ boosted asset purchases by 10 trillion yen ($126 billion), offering its second stimulus in just over two months in a show of its determination to achieve its 1 percent inflation target set in February.
Central bank policymakers agreed that Japan’s economy was gradually heading for a recovery with consumer prices expected to rise as a trend, minutes of the meeting showed on Monday.
But they decided to act to ensure that such positive momentum in the economy is sustained given various uncertainties over the outlook, such as the chance of tensions over Europe’s sovereign debt crisis triggering a renewed yen rise, it showed.
So has the ECB…
Nowotny Says ECB Not Discussing Reviving Bond Purchases
European Central Bank Governing Council member Ewald Nowotny said the bank isn’t considering restarting its bond-purchase program to stem rising borrowing costs for governments in the euro area.
“This for the time being is not a matter of discussion,” Nowotny told reporters in Belgrade today, when asked if bond purchases are something the ECB is contemplating. “The ECB has done a number of measures that were very helpful and efficient for the economy. We are now in a situation where we have to see how these measures have worked in the economy, especially in long-term operations.”
 Stocks lose shine as ECB signals no new stimulus
Stocks turned lower on Thursday after the European Central Bank indicated it would not, for now, ease its monetary policies further to fight the debt crisis and a U.S. services survey disappointed expectations.
Though the ECB’s decision to keep its main interest rate unchanged at 1 percent was expected, there was disappointment in the markets that the bank’s president Mario Draghi gave no indication it might offer more long-term super-cheap loans to banks or that monetary policy could be made more accommodative.
Even China, which has shown itself to be one of the biggest proponents of economic intervention of the last four years is curbing its stimulus efforts and signaling a slowdown.
China Has No Plan For Large Stimulus To Counter Slowdown
China has no plan to introduce stimulus measures to support growth on the scale unleashed during the depths of the global credit crisis in 2008, according to the nation’s state-run Xinhua News Agency.
The Chinese government’s intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth,” Xinhua said yesterday in the seventh paragraph of an article on economic policy, without attributing the information. “Current efforts for stabilizing growth will not repeat the old way of three years ago.” In 2008, policy makers unveiled a fiscal stimulus of 4 trillion yuan ($586 billion at the time).
Thus we have the world’s three most important Central banks as well as the global economy’s “economic miracle” retreating from aggressive monetary intervention.
The reality is that Central Banks are all realizing that:
1)   Their interventions thus far (QE in the US and LTRO in the EU) havefailed to solve the global banking crisis.
2)   The consequences of their interventions (namely inflation) are now outweighing the benefits (heck Bernanke was admitting this as far back as May 2011… and now even uber-dove New York Fed President Bill Dudley is admitting it).
This is an extremely dangerous environment: one in which the primary prop for the markets (central bank intervention) is becoming both less effective and politically toxic. Indeed, it’s clear at this point that the EU is beyond intervention since neither the ECB, IMF, nor the ESM have the firepower to hold things together.
Indeed, the one and only entity that might possibly hold up the EU would be Germany. However, if Germany were to go for this it would lose its AAA rating. The EU without a AAA rated Germany is not a pretty sight.
And it’s not even clear Germany could prop up the EU’s banking system. After all, when you include unfunded liabilities, Germany’s sporting a REAL debt to GDP north of 200%.
In plain terms, the EU is fast approaching its End Game. Germany and the other political leaders will stall for time and engage in verbal intervention, but in the end, there simply isn’t enough capital in the world to hold up the over leveraged (26 to 1) toxic sewer that is the EU banking system.


Source: http://gainspainscapital.com/?p=1783

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