Central Banks Don’t Have the Answer and Markets Know It

It was hard not to come away depressed after watching European Central Bank President Mario Draghi’s Thursday press conference, during which he basically admitted that policy makers are unable to reverse the rapid weakening in the global economy. Draghi said the euro-zone economy will now expand only 1.1 percent this year, a drop of 0.6 percentage point from forecasts just three months ago. He also pledged a package of new loans for banks, additional stimulus that ought to have been reassuring for markets.

But in a sign of the hopelessness of it all, stocks tumbled, and not only in Europe. At one point, the MSCI All-Country World Index fell as much as 1.18 percent in its biggest decline in more than two months. European banking stocks, which should have benefited most from the ECB’s pledge of new funds, fell as much as 2.58 percent as measured by the STOXX Europe 600 Banks Index, bringing its decline since late 2009 to 40 percent. To a growing number of market participants, that’s the problem. It’s almost impossible to have a healthy economy without a healthy banking system, but most of the ECB’s stimulus measures in recent years have been aimed at boosting inflation, which hasn’t worked. “It’s important to interpret what the ECB is doing as NOT further accommodation,” Bleakley Financial Group chief investment officer Peter Boockvar wrote in a note to clients. “It is in fact contractionary policy because they are damaging the income-producing ability of its banking system, which is the life blood of any economy.” And here’s the kicker: Some ECB Bank policy makers consider the downgraded growth forecast for 2019 still too optimistic, Bloomberg News reported, citing people with knowledge of the matter.