Dawn J Bennett, CEO and Founder of Bennett Financial Services and host of Financial Myth Busting, recently wrote an article titled, “The Central Bank Titanic,” in regards to the current state of the world’s central banks. January had a bleak beginning to 2016 for equities. The Dow was down 5.5 percent year-to-date, the Russell 2000 at negative 8.85 percent, the NASDAQ off 6.84 percent. Wall Street Journal’s Market Watch recently wrote that the Dow could lose a further 1000 to 5000 points and still not be “cheap” compared with long-term stock valuation measures. In fact, most stocks worldwide are down between 18 and 54 percent from the May 21, 2015 peak of the global equities markets.
So what was the rally in January really about?
“One reason could be month-end set dressing by hedge and mutual fund managers eager to have the appearance of a win after a particularly brutal start to the year,” said Dawn J Bennett. “Even more, though, was another round of “more of the same” central bank manipulation like we’ve seen for the last six years, as the Bank of Japan reversed a position announced a week earlier and moved to negative interest rates, joining Switzerland, Sweden, Denmark and the EU.”
The main role of central banks is to influence capital allocations and spending behavior by adjusting liquidity. Over the past seven years, they’ve gone overboard in this objective – attempting to influence consumers to purchase risky assets. Seeing Japan’s equities markets still faltering, Bank of Japan Governor Haruhiko Kuroda took interest rates into negative territory, hoping to chase investors into stocks and bonds in order to reach his inflation goals.
Dawn Bennett continued, “How is that working out? Not well. Japanese Government Bonds have moved to negative yields, and the Ministry of Finance is expected to announce a decision to call off the sale of 10-Year JGBs for the first time in history. Their stock market continues to fall. Amid these unintended consequences, Kuroda continues to say there is “no limit” to monetary easing, going so far as to say he would invent new tools if going farther negative doesn’t start movement toward his 2 percent inflation goal. The New York Times wrote that “moving to negative interest rates reflects a measure of desperation on the part of the central banks. Their traditional tools have been largely exhausted as most countries interest rates have been pushed to almost nothing.” In fact, that word, “desperation,” has been appearing a lot in this context.”
Could negative interest rates be coming to America? How far will Yellen go to keep money in risk assets?