The Central Bank Titanic: The Current State of the World’s Central Banks

January has been a bleak beginning for equities: the Dow is down 5.5 percent year-to-date, the Russell 2000 at negative 8.85 percent, the NASDAQ off 6.84 percent. Not to mention, stocks are still not considered “cheap” by any means. Recently, the 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. Stocks worldwide are down as well and it’s likely that February will also be a down month.

“What was Friday’s rally about, then?” asked Dawn J Bennett. “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. 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.”

She continued, “The primary role of central banks is to influence capital allocations and spending behavior by adjusting liquidity, and over the past seven years they have gone crazily overboard regarding that objective, engaging in every possible way to influence consumers away from a saving mindset and into purchasing riskier assets. Even given this, net purchases of stocks and bonds have been nearly flat since the middle of 2015. Seeing Japan’s equities markets still faltering, Bank of Japan Governor Haruhiko Kuroda took interest rates into negative territory on Friday, hoping to chase investors into stocks and bonds in order to reach his inflation goals.”

And it doesn’t seem to be working out well. Their stock market continues to fall and Japanese Government Bonds have moved to negative yields. The New York Times recently 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.

Read more from Dawn J Bennett here: