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Smoke & Mirrors ?

June 22, 2014

abstract smoke

When global central banks reduced short term interest rates to rounding errors in 2008, the mission was clear: prevent financial disaster and arrest a world wide liquidity crunch. Mission accomplished. Yet today, six years later, we still find zero interest rates and money printing on an epic scale. In the article “Central Banks shift into shares as low rates hit revenues”, The Financial Times reported this week that global central banks have accumulated $29.1 trillion of assets including equities pushing up prices in anything that can be exchanged for the promise of purchasing power of cash. For those of you that are having trouble with such large numbers, total annual global GDP is about $77 trillion. In essence, central banks have created nearly 40% of global real GDP through “unreal” activities.

GlobalGDP2014

Source Google

Rather than discuss the sense or nonsense of this global quasi-nationalization policy, I would like to point out to the reader that if history is our guide:

a) artificial price setting is always temporary in nature as price levels find their true levels in the long run

b) the longer price levels are kept away from their natural equilibrium, the bigger the resulting potential diversions and thus, the larger and more rapid the eventual price adjustment.

While the financial market skies are relatively blue at the moment, math and history both point to extreme conditions in the coming years. Enjoy the warm summer days for as long as they last. Winter is not too far away(first snow falling in September 2015 in my opinion).

 

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