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Central Banks Have Now Been Revealed to be Impotent!

Politics / Central Banks Aug 03, 2012 - 06:24 AM GMT

By: Sy_Harding


Best Financial Markets Analysis ArticleThis week central banks and euro-zone officials showed us that is the predicament they’re in.

In the U.S. the Federal Reserve, repeatedly threatened by a stumbling economic recovery, has fired off rounds of quantitative easing each time, accompanied by considerable hullabaloo. The effect was limited, the menace soon returning. And it’s become debatable whether firing off the quantitative easing was itself helpful, or if the temporary reprieve each time was just due to the hope raised by the accompanying rhetoric.

The threat of the economy slowing dramatically has returned again this summer, and this time the Fed seems only able to make a noise about having more ammunition it could employ, but not even willing to reveal what it is, let alone fire it off at the problems.

In Europe, euro-zone officials have been firing off repeated rounds of ammunition to no avail for more than two years. Each time the debt and banking crisis has soon come back at them even more aggressively, and they have waved additional weapons they might use and made a lot of noise that occasionally raised hope.

Several weeks ago they promised a  bazooka of a weapon, hatched out at an emergency summit meeting of the European Union, which was reported with a great deal of noise. That boosted markets and scared short-sellers away, but for only a very brief period, until it was realized it was a weapon designed by a divided committee and lacked a timing mechanism and trigger.

When the crisis came back at them a couple of weeks ago still more aggressively, with Greece and Spain both threatening to blow up the euro-zone, European Central Bank President Draghi jumped in saying the ECB would finally do as markets had been demanding and bring unprecedented firepower into action, “and believe me it will be enough.”

It was enough noise to scare the bear away for several days, but fooled so many times, it only moved into the bushes where it could watch and see if the ECB really had such weapons and would be able to use them.

And it didn’t.

Draghi was expected to reveal the ultimate weapons on Thursday morning. Expectations were for at least massive buying of the bonds of troubled Greece, Spain, and Italy, and easier terms for their rescue.

Instead, he gave a press conference in which he basically said, ‘Uh gee, the weapons are harder to carry than I realized, and I don’t seem to have others willing to help me right now. But we’ll try to come up with a plan to help maybe at our next meeting’.

As the Financial Times put it under a headline ‘Draghi Kills Hopes of Instant ECB Action’, “Mario Draghi demanded that troubled eurozone countries turn to existing rescue funds before any intervention by the ECB in bond markets . . . . Mr. Draghi said the ECB “may consider” again buying short-term government debt of troubled countries but would expect them to adhere to the “strict and effective conditionality” imposed by the EFSF.”

So in both the U.S. and Europe it’s back to dependence on rhetoric and promises from central banks to maybe use effective weapons sometime in the future.

There were three ‘great expectations’ events scheduled this week. The first two, the Fed’s FOMC meeting on Wednesday, and the ECB meeting on Thursday, were big disappointments.

Fortunately, the third, the Labor Department’s monthly employment report for July, came through impressively. Although the unemployment rate unexpectedly ticked up from 8.2% to 8.3%, there were 163,000 new jobs created, much better than the consensus forecast of 100,000. That snapped three straight months of job gains being well under 100,000.

However, each month I remind you of the history of the monthly jobs report. It almost always comes in with a surprise in one direction or the other, which in turn creates a one to three day triple-digit move by the Dow in one direction or the other. (The last three reports were surprises on the downside).

The other side of the pattern is that the initial move is then usually reversed over subsequent days as the market returns to whatever was its focus prior to the report.

A month ago the initial downside reaction to the negative surprise in the jobs report was reversed to hope that central banks were about to come to the rescue.

This time a reversal of the upside reaction to the positive jobs report will probably be a return to focusing on the euro-zone crisis, slowing global economies, and the now apparent reluctance of central banks to step in.

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2012 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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