CENTRAL BANK CONSENSUS (Negative Consensus/Bull Market Indicator): Club Fed franchises out

February 2, 2015

Wait! Wait! Come back! (Courtesy @Financialtailor)

Wait! Wait! Come back! (Courtesy @Financialtailor)

Central Banks around the world appear to have collectively decided to run a full-court press to pump up their respective economies to address the malaise that has plagued global commerce. A Who’s Who of Central Banks have decided to take a page from the Federal Reserve of the United States (or as we call them Club Fed) and adopt their own flavour of aggressive buying of bonds to flood the world with cash in the hopes that the excess cash will be invested in machines, people, and product development to pull the world out of its economic funk.

We can add the European Central Bank to the ring of honour. After literally years of thinking out loud about engaging in some sort of money printing exercise, the ECB finally put their money where their mouth is. The ECB announced an aggressive program of purchasing 60 billion worth of bonds each month until at least 2016. The Euros join the patriarch US Federal Reserve, the Bank of England, the Bank of Japan and to a certain extent the People’s Bank of China.

The textbook rationale is the current economic environment is untenable and likely to get worse. By pumping money into the market, inflation would be generated via increased capital investment, however, what has happened is that companies have taken this excess cash and undertaken some financial engineering in the form of buying back stock, and increasing dividends. Wage growth has been mired in a low trading range. Asset prices on the other hand have soared as investors seek out any semblance of yield.

So a program designed to stimulate economic growth has created growth that has benefited a small segment of society. Now the Euros have jumped in and opened up their own Club Fed franchise in the hopes of digging the continent out of a potential deflationary spiral. History has shown that every iteration of this strategy has benefitted stocks and other tangible assets like real estate. So get on your dancing shoes. The techno-party is getting underway across the Continent. Pace yourself.