Thursday, May 21, 2015

Central Planners
On Monday, Josh Brown, a panelist on CNBC’s “Halftime Report,” commented that the major central bankers’ policy of “kicking the can down the road” seems to be working. Since the start of the bull market in stocks, the bears have argued that ultra-easy monetary policy was only postponing the “endgame.” They said that central banks were kicking the can down the road, implying that there was a cliff or a brick wall at the end of the road.

If you kick the can down the road, you delay a decision in hopes that the problem or issue will go away or somebody else will make the decision later. The phrase also means to defer conclusive action with a short-term solution. In this particular version of the game, there is no endgame as long as there is another short-term solution. The major central banks have been playing this game by providing additional rounds of monetary easing when the previous rounds didn’t revive growth or boost inflation as well as they had hoped. So ZIRPs (zero-interest-rate policies) have been followed by QEs and NIRPs (negative-interest-rate policies) and QQEs.

Brown was specifically talking about the Eurozone’s problem with Greece. It started in 2010, when the country needed a bailout to avoid a Grexit that threatened to unravel the monetary union. It was provided, and so was lots of easy money by the ECB. Brown opined that while the problem hasn’t been solved, the short-term fixes bought time for the Eurozone to reduce significantly the damage that would result from a Grexit. The strength in the EMU MSCI this year, despite the possibility that Greece might soon default after all, confirms Brown’s view.

The latest news is that Greece needs to borrow more to make its debt payments. The socialist government has rehired public employees and refuses to cut pensions. That news did unnerve Eurozone stock and bond markets last week. So ECB officials let it be known that their current QE bond-buying program will be front-loaded during June and July. Stocks and bonds recovered on this news.

The major central bankers have become central planners. They are using all the means available to them to manage their economies. Central planning invariably produces suboptimal economic performance. Central planners tend to be experimenters, like some mad scientists in a lab. When their plans don’t pan out as they predicted, they try something else or more of the same. If nothing else, it’s a good diversion. The public is told that while the previous plan was a disappointment, the next one will work great. If all else fails, blame a few of the planners and execute them.

So what’s the latest plan? More of the same, with an increased emphasis on driving stock prices higher. If so, then this raises the odds of a global stock market melt-up. The major central banks are run mostly by macroeconomists rather than bankers these days. They believe that one of the major “transmission mechanisms” between monetary policy and the economy is the wealth effect.

Their critics say that the policies of the central bankers have worsened income and wealth inequality and thereby perversely contributed to global secular stagnation. I’m inclined to agree. Needless to say, the monetary central planners reject this critique and insist that they’ve been relatively successful so far, at least in averting another global recession and financial crisis. Consider the following:

(1) China. Monday’s WSJ included an extremely germane article on this subject. It is titled “As Chinese Stocks Rise, Beijing Wins.” The main point is that the Chinese government, which in the past viewed the stock market as a casino for speculators, now is using it to boost the economy and enable reforms.

(2) Japan. They must be doing high-fives at the BOJ. Real GDP rose by an annualized 2.4% during Q1, much better than a revised 1.1% in Q4. It also beat a 1.5% growth forecast by economists in a WSJ survey. The BOJ continues to buy bonds under its QQE program. As a result, the monetary base is up 35% y/y. Japan’s central bank also continues to support the stock market, as a 5/13 Reuters article reported.

(3) Eurozone. The ECB isn’t buying stocks (just yet), but the bank’s officials are certainly doing their best to boost stock prices by depressing the euro and keeping a lid on interest rates. Last Thursday, ECB President Mario Draghi countered any notion that the bank’s QE might be tapered ahead of schedule. He was clearly concerned about the recent backup in bond yields, strength in the euro, and weakness in stock prices.

(4) US. So far, this year hasn’t been a good one for the Stay Home investment strategy. It’s been much better for the Go Global strategy. That’s mostly because the Fed has been out of sync with the other central banks. The FOMC terminated QE last October and has been chattering about whether liftoff for the federal funds rate should come sooner or later this year. The suspense has weighed on the US stock market.
(Based on an excerpt from YRI Morning Briefing)

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