...now that this is becoming the fashionable new mini-stimulus for countries suffering in the doldrums of this deflationary cycle, it isn't quite so surprising as it once was. It's now almost predictable.
Surprise! The Reserve Bank of Australia just cut interest rates to a record low of 2.25%, citing growth at a “below trend pace” as well as low domestic demand growth and an unemployment rate that is now expected to plateau “a little higher than expected.”
For those keeping track at home, this is the 15th such “surprise” central bank rate cut announcement of the year, following Singapore, Denmark, Turkey, Peru and a raft of other nations, including perhaps most notably Russia, Switzerland and Canada. Of course, now that this is becoming the fashionable new mini-stimulus for countries suffering in the doldrums of this deflationary cycle, it isn't quite so “surprising” as it once was. It's now almost predictable. Central bank cuts rates. Major stock indexes spike (at least momentarily). The currency depreciates. Bond yields crash. Mission accomplished?
Not so fast. The spike of investor euphoria caused by these unexpected rate cuts is becoming more transient each time. This time the spike lasted about an hour before it started leveling off. Like a drug addict in need of an ever-bigger fix, markets are becoming immune to these mini-stimuli. It's Draghi-style bazooka or nothing. And even then...
The net effect of these diminishing returns is that central banks are losing control over the bubble of economic unreality they have so carefully blown over the past six years. All of these easing and stimulus programs have inflated equities markets and asset prices, but now the slow-motion implosion of the Russian economy is combining with the ongoing disintegration of the Eurozone and the plummeting oil price (not to mention the Chinese manufacturing slowdown, the extremely weak sales at the latest Japanese government debt auction, the Swiss decoupling and any number of other destabilizing events) to pop that bubble by testing its weakest points: the foreign exchange market. Currencies are decoupling both by decree (see the recent move by the Swiss National Bank) and by circumstance, as the US dollar continues to strengthen against any number of devaluing national currencies. This eats into corporate earnings, causing stock sell-offs and creating large swings in the stock market. Last month saw moves of more than 100 points on the DJIA on nearly three-quarters of all trading days.
This central bank-dictated economy is like a top. When it's in motion it can remain upright, but if it slows down too much it will topple over. As long as the central banks continue putting more and more stimulus into the economy at shorter and shorter intervals, the top can continue spinning. But as soon as they ease up on that input, the whole thing will come crashing down. And just like in 2008, it's going to be the public, not the banksters, holding the bag. Surprise!