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Stocks Dive as Confidence in Fed Fades

By       Message Mike Whitney       (Page 1 of 2 pages)     Permalink    (# of views)   3 comments

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Reprinted from Counterpunch


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"Investors are losing confidence in central bank policies. (They) have done all they can do, and these policies may not improve economic growth or may not support financial markets." -- Anthony Valeri, investment strategist at LPL Financial

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Zero rates and QE have stopped working and that has investors worried. Very worried.

If you want to know why stocks have been taking it on the chin lately, look no further than the quote above. Mr. Valeri nails it. The Central Banks have lost their touch which is why investors are cashing in and heading for the exits. This has nothing to do with the slowdown in China, bank troubles in Europe, capital flight in the emerging markets, droopy oil prices, or the deceleration in the global economy. Forget about that stuff. The real problem is that investors have lost confidence in the Fed. And for good reason.

Keep in mind, that for the last five years or so, bad news has been good news and good news has been bad news. What does that mean?

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It means that every report that showed the economy was underperforming or getting worse was greeted with cheers from Wall Street because they knew the Fed would promise additional accommodation (QE) or continue to maintain zero rates into the future. The Fed conditioned investors to ignore fundamentals and merely respond to the Pavlovian promise of more cheap money. That cheap money helped fuel a rally that tripled the value of the S&P 500 while inflating asset bubbles across the spectrum. But now the impact of low rates appears to be wearing thin which has investors concerned that the Fed has run out of bullets.

Why? What changed?

In the last couple of weeks, the second and third biggest central banks (The European Central Bank and the Bank of Japan) either announced or launched additional easing programs, but to no effect. The BOJ implemented negative rates (NIRP) expecting the yen to weaken and stocks to rally. Instead, stocks fell off a cliff losing an astonishing 7.6 percent on the Nikkei while the yen strengthened by nearly 10 percent against the dollar. In other words, the results were the opposite of what the BOJ wanted.

The same thing happened to the ECB although Mario Draghi has not actually increased QE yet. The ECB is currently buying 60 billion of mainly sovereign bonds per month under the existing program ostensibly to trigger credit growth and boost inflation. Draghi increased speculation that he would boost the bank's monthly purchases (by 15) at the World Economic Forum in January when he said:

"We have plenty of instruments. We have the determination, and the willingness of the governing council to act and deploy these instruments."

Usually, a strong statement like that would be enough to send stocks into the stratosphere, but not this time. Since then, EU markets have tanked and the euro has strengthened against the dollar. Once again, the results have been the exact opposite of what was intended.

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So the question is: If the promise of easy money and QE is no longer working in Japan or Europe, why would it work in the US? Or, put differently: Has radical monetary policy lost its ability to prevent stocks from going into freefall? (The Bernanke Put)

This is what investors want to know.

Keep in mind, QE has not increased inflation in any of the countries where it's been implemented. Nor has it boosted lending, triggered a credit expansion or strengthened growth. It's a total fraud. But it has had a big impact on stock prices, which is why central banks love it.

But now that's changed. Now QE is backfiring and zero rates have lost their potency. Investors know this. They know that monetary policy has run-out-the-clock and that overpriced stocks -- which have been outpacing flagging earnings for years -- are going to return to earth with a thud. This is why the selloff could continue for some time to come.

Of course, now the focus has shifted to "negative interest rates," the latest fad in central banking that is supposed to boost lending by charging banks a small fee on excess reserves. It's another nutty attempt to prove that if you put money on sale, people will borrow. But what we've seen over the last seven years is that there are times when people won't borrow no matter how cheap money is. The Fed can't seem to grasp this. They can't see to wrap their minds around the simple fact that reducing the cost of borrowing, does not always make it more desirable. Households that are trying to pay down their debts, increase their equity or save for retirement might not want to borrow regardless of how cheap the rates might be.

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Mike is a freelance writer living in Washington state.

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