Prophets

Central Banks Are Too Invested to Pull Back Now

The Fed’s calls to return to monetary policy normalcy are nothing but blather.

Central banks are raining down cash on markets.

Photographer: Christopher Furlong

Money created from nothing and tossed from central bank helicopters into the financial markets has become the norm. The sky is raining dollars and euros and yen. The thunderstorm has continued unabated since 2008, and nine years later there’s no end in sight, despite chatter from the central bankers on their desire to pull back. They can’t.

For generations, the Federal Reserve and the other global central banks could only control the short end of the bond markets. They had some, but not much, effect on the long end and less influence on the equity markets. Well, that world no longer exists. I doubt that it will exist again during our lifetimes. This, as television variety show host Ed Sullivan used to say, is the “really big show” that most investors are ignoring because the central banks do everything in their power to try to get them to ignore it.

The Fed’s balance sheet has been ramped up to $4.48 trillion. This is not from the creation of new money, but from the interest earned on the money they have already created. Therefore, if one thinks it through, it is the creation of money squared. The Fed is still making new money, just in a different fashion. How convenient.

The Swiss National Bank, the Bank of Japan and the European Central Bank are still performing their magic tricks. Money for nothing, checks for free, buying corporates, buying equities, buying derivatives and as the rock group Dire Straits aptly put it, “Now look at them yo-yos, that’s the way you do it.”

So, in the U.S., Switzerland, the European Union and Japan we have a bunch of unelected officials sitting in the “counting houses” making money and tossing it about as they see fit. They make every argument imaginable about keeping their independence. Who wouldn’t? They are controlling the world. Yes, I mean exactly and precisely that, “they are controlling the world.” As Mayer Amschel Rothschild, the founder of the Rothschild banking dynasty, is credited with saying, “Give me control of a nation’s money and I care not who makes its laws."

That’s why the Fed’s calls to return to normalcy are nothing but blather. It is one more attempt at distraction while more money is generated from the flicks of a wrist on some central bank’s keyboard.

In practical terms, what does it mean? It means the equity markets are not going down, in any significant manner, at any time in the foreseeable future. It’s the flow of money, not earnings, that is driving the bus.

It also means bond yields are not going up in any significant manner in the foreseeable future. We are again at the 2.32 percent line in the sand for the benchmark 10-year Treasury note. It could bounce this way or that way in the short term, but a 3 percent yield is not happening any day soon.

Yield spreads as measured by the Bloomberg Barclays Investment Grade Corporate Bond Index are the tightest of the year at 103 basis, which is also the tightest since measuring 102 basis points in September 2014.

Bloomberg Prophets Professionals offering actionable insights on markets, the economy and monetary policy. Contributors may have a stake in the areas they write about.

    To contact the author of this story:
    Mark Grant at mjgrant@bloomberg.net

    To contact the editor responsible for this story:
    Robert Burgess at bburgess@bloomberg.net

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