(By Mike) This week, the world's major central bankers gathered in their Ivory Towers. They debated the economy and talked markets, and expectations from investors around the world couldn't have been higher.
From Wall Street to London to Frankfurt to Tokyo, they were all hoping and praying that the Federal Reserve, the Bank of England, the European Central Bank, or perhaps ALL of them would save their bacon!
So what did policymakers actually do?
They didn't bring ANY policy "bazookas" to the table at all! That has major implications for you and your investing strategy, so let me get right to them!
Bernanke Chooses to
Sit on His Hands!
In a speech before Congress a few weeks ago, Fed Chairman Ben Bernanke laid out several ways he THOUGHT the Fed could actually accomplish something. I wrote at length about those options as well: Cutting the interest rate paid on excess reserves (IOER), extending the low rate pledge from 2014 to some further-out period of time, or launching QE3.
This week, however, the Fed punted …
Officials said that "economic activity has decelerated somewhat" … "the housing sector remains depressed" … and "growth in employment has been slow." But they didn't do anything new at all, just reiterated that they are already doing things like Operation Twist and keeping the federal funds rate pegged in a range of 0 percent to 0.25 percent.
There was a line thrown in there about how policymakers will "closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed." That kept the QE junkies from completely throwing up their hands and running for the hills on Wednesday. But for reasons I'll explain in a minute, the calm didn't last long.
My take on the latest Fed action (or IN-action, as the case may be)? These men and women are out of bullets and they know it!
Every single remaining option has drawbacks, the biggest of which is that they'd be even less effective than past market manipulations. So rather than actually do anything, and prove they're essentially impotent, they're trying to play a game with the markets.
They're trying to continually dangle a "QE carrot" out there — even as unbiased research and recent, real-life examples in countries like the U.K. and Japan suggests more money printing will have close to no impact at all!
I have no doubt the Fed will try at some point to do something further, if backed into a corner by an even sharper decline in the economy or markets. Where I differ from most on Wall Street is that I believe any such announcement will be aggressively SOLD now that investors know there's no "oomph" behind these kinds of moves anymore!
ECB All Talk, No Action!
So what about the ECB? It was perhaps the most closely watched of all the world's central banks. That's because ECB President Mario Draghi whipped traders into a frenzy last week by pledging in a speech that he would do "whatever it takes to preserve the euro."
But talk about a letdown!
On Thursday morning, the ECB didn't cut Europe's 0.75 percent benchmark rate. Nor did it launch any huge new sovereign bond buying program. All it did was say that it MAY buy bonds down the road, and that indebted countries like Italy and Spain are better off going to other bailout programs to get their dough.
The problem is, Europe's EFSF bailout program is running out of cash. And its ESM program hasn't even been put into place officially yet because of a lack of unanimous government support and a German court challenge.
The sense of disappointment all over the world was palpable, and markets sold off sharply on Thursday. The euro currency fell so hard, it's now within a whisker of fresh multi-year lows!
Is the lack of central bank action the catalyst for the potential market wipe out I've been discussing? You bet!
And you know what? Even IF the ECB, the BOE, or the Fed do realize they screwed up, and say soon that they will in fact launch new QE programs or buy more government bonds, I don't think it will matter for more than a few days … or even hours!
Just look at the facts! The Fed has already done QE1 and QE2, not to mention Operation Twist 1 and 2. The ECB has already bought bonds issued by troubled sovereign countries. The BOE has already agreed to purchase hundreds of billions of pounds of U.K. bonds.
But none of that monetary garbage has worked! Despite ALL of it, the U.K. has sunk into a double-dip recession … six European countries have done the same … and the U.S. economy has slowed sharply. So if investors are counting on central bankers to bail them out, guess what! These guys don't have any bazookas left. All they have is pea-shooters!
Until next time,
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