It is not hard to see why stock markets rally when investors believe the most powerful central banker in the world wants to print money and see stock markets go up. As Mohamed El-Erian, chief executive officer at Pacific Investment Management Company, said, Central banks are our best friends not because they like markets, but because they can only get to their macro objectives by going through the markets.” Properly reflected on, this is staggering in its implications. A supposedly neutral central bank has decided that it can engineer a recovery by inflating asset prices. The objective is to create a wealth effect that will make those who invest in stocks feel wealthier and then decide to spend money and invest in new projects. This will eventually be felt throughout the economy. This trickle-down monetary policy has been successful in creating wealth for those who were already rich (and for the banks and investment management firms who service them) but has been spectacularly a failure in creating good jobs and a high-growth economy. The latest quarter as we write this letter will be in the 1 percent gross domestic product (GDP) range. And to listen to the speeches from the majority of members of the Federal Reserve Open Market Committee, their prescription is more of the same. Indeed, when Bernanke merely hinted this summer that QE might end at some point, something that everyone already knows, the market swooned and a half-a-dozen of his fellow committee members felt compelled to issue statements and speeches the next week, saying, Not really, guys, we really are going to keep it up for a bit longer.” from John Mauldins Thoughts from the Front Line, Nov 01, 2013
Posted on: Wed, 06 Nov 2013 06:09:39 +0000
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