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The ECB’s Tough Balancing Act – Bubbles vs DeflationGary Dorsch Today, a small group of central bank chiefs can meet in private and wield unprecedented power over global markets, economies, and wealth distribution. They are held accountable to the ruling politicians that in most cases have no respect for the principle of sound money. Instead, in Europe, the UK, Japan, the US, and elsewhere, central bankers have become intricately linked to monetizing government debts, and financing the expansion of the welfare state. As such, disciplined and independent central banking, a cornerstone to any hope for sound money and credit, has been relegated to the dustbin of history. Central banking, - ostensibly designed to combat high levels of inflation and promote economic growth, while overseeing the stability of the banking industry, has instead, morphed into technocratic planning boards that are constantly involved in rigging the value of the financial markets. Their principal modus of operandi is to encourage risk taking in the local stock markets, through massive injections of ultra-cheap liquidity. However, the result isn’t better economic conditions, but rather the expansion of massive bubbles in various financial markets. In turn, central bankers have widened the wealth gap between the owners of equities, and the rest of the struggling population whose wages are sliding backwards, and is increasingly seeking out assistance through welfare programs. Historically, the value of the stock market reflected the dynamics of the local economy, and would influence the social mood of the populace. A stock market that is booming would signal an up-and-coming economy that would be followed by increased business investment and the creation of good paying jobs. Rising share prices boost the fortunes of about 10% of households in the country, and triggers a greater propensity to spend for goods and services – otherwise known as the “trickle down” effect. Therefore, keeping a constant vigil on the behavior of the stock market, - has become the raison d'être of central banks. In earlier times, stocks traded on the local stock exchange used to track or even anticipate the nation’s business cycle. But that reliable role as a leading indicator began to seriously break down after the financial crisis of 2008. Since then, because of the hallucinogenic effects of “quantitative easing” (QE), - stock markets are no longer reflections of the health of the local economies or forecasting mechanisms of the business cycles. Instead, they are just slices of ownership in specific companies that are unreliable gauges of anything but the underlying strength of the companies they represent, their dividend payments and buybacks, and the schizophrenic mind-set of the traders who buy and sell the shares.
EuroStoxx index Rebounds to 2-year high, - Supported by anecdotal signs of a recovery in the Euro zone factory sector, - the exchange traded fund for the EuroStoxx Index, (NYSE ticker: EZU), has managed to recoup most of its losses from the Bear market of 2011-12. EZU rebounded to $40 per share in October ‘13, capping a +54% gain from the low of July 2012. Yet fifteen months ago, FX traders were piling up bets on the break-up of the 17-country currency bloc, and EZU had tumbled to as low as $25.50 per share, and nearing its lowest levels since the depth of the 2008 financial crisis. However, with a few ad-libbed words, Europe’s chief central banker, Mario Draghi changed the course of the Euro-zone debt crisis. “The ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough,” Draghi warned on a warm summer day in London. That was enough to stabilize the Euro at $1.200 and stop EZU’s bear market in its tracks. After six weeks of frenzied backroom bargaining, the ECB said it would buy unlimited amounts of sovereign bonds of troubled debtor countries that sign up for strict austerity measures, - through its Outright Monetary Transactions program (OMT). For equity traders markets, the OMT was like a nuclear weapon: the mere threat of its use was enough to fuel a 15-month rally that lifted EZU to as high as $40 per share and helped to support the Euro’s rally to $1.3800 in late October ‘13. Draghi declared it a master stroke. “It’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent time,” he said in June ‘13. Draghi’s verbal intervention coincided with a bottom in the Euro zone’s Purchasing Managers' Index (PMI) that gauges the health of the factory sector. The factory PMI bottomed out at the 44.5-level in June ’12 and rebounded to the 51.3-level by October ‘13, signaling that Europe’s longest postwar economic recession has ended. New orders for industrial goods have increased for the fourth month in a row, and factory output increased in Spain, Italy and Ireland meaning the bloc’s nascent recovery is becoming more broad-based. In this case, traders can point to the chart showing the direction of the EuroStoxx markets and the gauge of the local factory sector moving in synchronization, as would historically be the case.
German DAX disconnects from Economy, - Tracks Euro /Yen Carry trade, - Yet the rally in the broad based EuroStoxx index is somewhat deceptive. Most of the EuroStoxx’s gains were powered by the steaming locomotive - Germany’s DAX-30 index, which has climbed above the 9,000-level, - it’s highest in history. The disparities of market performance are wide. Germany’s DAX index is hovering +13% above its pre-crisis highs of 2007, and stands out far above the rest of the pack. In stark contrast, France’s CAC-40 index is still trading -31% below its 2007 high, Spain’s Ibex-35 index is -39% lower and Italy’s Mib-40 index is a whopping -57% below its peak levels of six years ago. In March ’13, a study produced by the Vanguard brokerage firm, concluded that fundamentals, - corporate earnings, profit margins and gross domestic product (GDP) growth, are useless when it comes to forecasting stock market trends. For instance, Germany’s blue-chip DAX-30 index is +18% higher since the start of 2013, and is +50% higher since the beginning of June 2012, even though is $3.4-trillion economy expanded at a paltry +0.9% annualized rate. The big disconnect is explained by the fact that German companies listed in the DAX index earn 70% of their revenues from outside the country. That’s increasingly the case for the Euro-Stoxx-600 companies - 33% of their sales in 2013 are with emerging markets, - from China, to Turkey, to Brazil, or three times greater than in 1997. Sales from within the Euro-zone fell to 46% of transactions this year, - and down from 51% in 2012 and 71% in 1997. Germany’s DAX-30 index has defied weak economic data, and topped the 9,000-point mark for the first time in its 25-year history. What’s not widely recognized is that the DAX rally is primarily fuelled by a torrent of cheap money flowing from the printing press of the Bank of Japan. Alongside the DAX’s parabolic surge, the Euro has also rallied from a 10-year low of ¥96 in July ’12 to as high as ¥134 in Oct ’13. Carry traders are borrowing Japanese yen and swapping into German equity indexes. Currency carry traders are keen to see the DAX index surge to 10,000-points, even though it’s unlikely that German DAX profits can keep pace. In other words, Tokyo is inflating a massive bubble on the Frankfurt Stock Exchange. To read the rest of this article, please click on the hyper-link located below: http://sirchartsalot.com/article.php?id=182 ### Nov 6, 2013 321gold Ltd |
