A Change in Tone Amongst Central Bank Language Forewarns an End to the "Good Times"
As we’ve noted in recent articles, the US Federal Reserve has blown another bubble in stocks and facilitating the exact same risk-taking behavior that brought about the 2008.
The Fed realizing that it’s done this, which is why it’s now trying to manage down expectations of future stimulus (see the multiple suggestions from Fed officials that the Fed might reduce QE before hitting its unemployment target).
The Fed is not the only Central Bank to have shifted tone.
Chinese authorities took a step to ease potential inflationary pressures Tuesday by using a key mechanism for the first time in eight months.
The move by the central bank to withdraw cash from the banking system is a reversal after months of pumping cash in. That cash flood was meant to reduce borrowing costs for businesses as the economy slowed last year—but recent data has shown growth picking up, along with the main determinants of inflation: housing and food prices.
The People's Bank of China used a liquidity-draining tool in the interbank market that enables the central bank to borrow money from commercial lenders. It withdrew 30 billion yuan ($4.81 billion) by offering 28-day repurchase agreements, alternatively known as repos. The PBOC hadn't offered repos since June.
"The central bank is trying to send a message that it will not tolerate too-easy liquidity conditions," Dariusz Kowalczyk, a senior economist at Crédit Agricole, ACA.FR +0.99% wrote in a research note.
Investors are ignoring this story for the most part. This doesn’t bode well for the economy as China was the alleged growth story that pulled the world out of recession in 2009. China did this via a massive stimulus program equal to nearly 20% of GDP (not to mention a massive expansion of its banking system).
So if China is curbing its stimulus, the rest of the world will soon feel the impact.
Another Central Bank that has failed to engage in more monetary stimulus is the Central Bank of Japan. Despite, recently re-elected Prime Minister Shinzo Abe has been talking down the Yen and urging the Bank of Japan to act aggressively to raise the stock market and Japanese economy, the Bank of Japan didn’t announce any new QE or stimulus in its latest meeting.
The significance of this is tremendous. Besides the Fed, the Bank of Japan is one of the most profligate money printers in the globe. For the Bank of Japan to NOT announce any new QE despite extreme pressure from Japan’s prime minister is yet another warning that something major has changed in the financial system.
With that in mind, smart investors are taking advantage of the lull in the markets to position themselves for what’s coming.
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