...the promise of central bank funny money, which is really all that's needed these days to send investors into a tizzy and to keep the longest bull market in recent history ascending into the stratosphere.
The market is giving itself another congratulatory pat on the back this week as the S&P flirts with the 2000 point territory. Another week, another high. Another month, another psychological market barrier crashed through with abandon.
So what is it this time? The discovery of some new abundant source of safe, clean energy? An invention that will increase productivity by orders of magnitude? Soaring demand on the back of a solid across-the-board economic recovery? Sadly, no, it's just more Hope and Change-ium from the central banking crowd.
This time it's European Central Bank chief Mario Draghi delivering the market its much needed jolt of central bank funny money. Or, more accurately, the promise of central bank funny money, which is really all that's needed these days to send investors into a tizzy and to keep the longest bull market in recent history ascending into the stratosphere. At the annual conclave of central bankers (is that technically called a “coven”?) in Jackson Hole, Wyoming last week Draghi said that the ECB was preparing to use “all the tools at its disposal” to boost Eurozone inflation rates up to their 2% target if prices continue to grow in the 0.3-0.4% range as they have so far this year. Translation for the stimulus-hungry investor: KA-CHING!
The markets did the expected thing on Monday after a weekend of contemplating Draghi's words. It didn't take long for those markets to decide that Draghi was getting ready to let QE-Europe roll and Eurozone stocks rebounded as the Euro itself sunk. In other words: Mission Accomplished. And all of that without actually doing anything.
If that sounds familiar, that's because it is. Not only have we seen this market-levitation-by-words-alone act play out in country (US) after country (Japan) in recent years, we've seen Draghi himself do it just two years ago. Remember all that “Draghi Bazooka” hoopla of two years ago when all the talk was about the ECB's “unlimited bond purchases” to inflate the Eurozone? Neither does anyone else. But it doesn't matter. The “bazooka” buoyed the markets then and this latest “all the tools” rhetoric is having its intended effect now, spilling over into US markets where the S&P continues its seemingly unstoppable rise.
So is it really that easy? Can these bankers merely speak the economy into overdrive? Of course not. But they sure can keep the bubble inflating for a long time.
But just as surely as “what goes up must come down,” so too the markets that inflate must deflate at some point. Does anyone remember Black Monday 1987? The largest one day drop on the stock market in history (including the Great Depression)? That came after a three year bull run which saw the Dow rise 45% and the Nasdaq rise 31% in 1987 alone. And the crash began with a slight market stutter on August 21st, just a stall in the seemingly unstoppable freight train to the top. By October 6th, that stall had become a full-fledged sell-off with a record 92 point drop on the Dow. This began 10 days of increasingly heavy selling until Monday the 19th brought about the unprecedented 23% drop on record trading volume. No one saw it coming then, either.
The only difference between now and then is that in 1987 the market drop caused Reagan to create the “Plunge Protection Team” to begin manipulating the markets in earnest. Today the markets are already being manipulated in earnest, and the rug is about to be pulled out from under the Team. Happy landings.