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. Dawn Bennett said, “Despite last Friday’s 300-point run up in the market, January has been a bleak beginning to the year 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. And truthfully, stocks still can’t be considered cheap. In fact, 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. In fact, most stocks worldwide are down between 18 and 54 percent from the May 21, 2015 peak of the global equities markets. If history is any guide, it’s likely that February will be a down month as well: since 1957, there have been 20 January months that posted negative returns, and the likelihood of February being negative as well is between 75 and 85 percent.”
So what was the rally about? Month-end set dressing by hedge and mutual fund managers are likely eager to have the appearance of a “win” after such a brutal start to the year. As we’ve seen in the past six years, there was simply “more of the same,” 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.
Dawn Bennett continued, “Let’s unpack that some. 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.”
How is this working out? Not well, according to Dawn Bennett.
“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.”