Why You Can't Count On Central Banks In 2012

MSN Money January 24, 2012

1/23/2012 8:04 PM ET

By Jim Jubak

The axiom says when central banks provide stimulus, markets will rise, so investors should follow along. But this year, counting on central banks could cost you.

Jim Jubak

Don't fight the Fed.

It's an important piece of Wall Street wisdom built on the often-demonstrated power of changes in the Federal Reserve's policies on interest rates and the money supply to overwhelm all other financial market trends. When interest rates are headed down and the money supply is headed up, most of the time stocks head up, too.

Not always, of course, since the Fed itself can get overwhelmed by a global financial crisis here or a eurozone debt crisis there, which can lead to a situation where the real economy doesn't respond to the Fed's prodding.

But the saying is true frequently enough that aligning your investment strategy with Federal Reserve policy makes sense most of the time.

So what about when it isn't just the Federal Reserve lowering interest rates and pumping money into the domestic economy? What if the European Central Bank is pursuing the same course in Europe, the Banco Central do Brasil is doing it in Brazil, and, just beginning but accelerating, the People's Bank of China is doing this in China?

Is this flood of cash enough to push stocks higher in 2012 -- no matter what the real global economy does? Traders and investors have started 2012 by answering with an emphatic "yes." January's rally in U.S., European and emerging-market stocks is based on a belief that the huge wave of cash that the world's central banks have unleashed -- or are about to unleash -- on global economies will send stock markets higher and set economies to growing faster.

Let me give you two reasons why the global version of "Don't fight the Fed" won't work out as well as the current optimism suggests. I can see two problems. One is called "pushing on a string." The second is called "inflating asset bubbles."

The US Fed pumps in cash

If the world's central banks can't pull off a global rescue this time, it won't be because they haven't tried. They've thrown a lot of money -- and I mean a lot of money -- at the global economy.

For the week ended Jan. 18, 2012, the Fed's balance sheet stood at $2.96 trillion. That's up $488 billion from the week ended Jan. 19, 2011. The increase is substantially due to the Fed's purchase of $576 billion in Treasurys. (The Fed bought Treasurys while selling mortgage-backed securities, resulting in the $488 billion net increase.) That's $488 billion in cash created by the Fed and pumped into the $14.7 trillion U.S. economy in the last year.

In my book, $488 billion is a lot of money. But it is less than the Fed's $600 billion in purchases of Treasurys as a result of the second program of quantitative easing, announced in November 2010, or the $1.4 trillion in purchases of mortgage-backed securities and Treasurys in the first quantitative easing, which began in 2008.

Europe, Brazil play the same game

Officially, the European Central Bank has steadfastly refused to follow in the Fed's footsteps and pursue its own program of quantitative easing. But that doesn't mean the central bank hasn't been pumping money into European economies under some other name. Because of its program of buying Italian, Spanish and other stressed sovereign debt and because of the loans that the central bank has extended to European banks -- most recently 489 billion euros ($629 billion) in three-year loans in December 2011 -- the assets on the European Central Bank's balance sheet have climbed to 2.68 trillion euros ($3.4 trillion) in the week that ended on Jan. 13 from 1.89 trillion euros in June 2011.

Why can't the Fed fix this economy?

The European Central Bank has been creating money at a pace that leaves the U.S. Federal Reserve in the dust.

Of course, not all this bond buying by the European Central Bank results in additions to the money supply. The bank works to cancel out additions to the money supply from buying bonds by issuing bonds that it sells to European banks -- a process called sterilization. When a bank buys one of those bonds or otherwise parks money with the central bank, it withdraws money from the markets.

There's a limit to how much bond buying the European Central bank can sterilize. The Netherlands banking group Rabobank calculates that the central bank can mop up about 300 billion euros -- and that at the rate of bond buying the bank has conducted since August, it will hit that limit sometime this month. Add in the huge bank lending in December and a second likely round of three-year loans to banks from the central bank in March, and investors are looking at a de facto program of quantitative easing despite all the protests from European Central Bank President Mario Draghi.

In Brazil, money supply growth dropped in the first half of 2011 as the Banco Central do Brasil raised interest rates and tightened monetary policy to fight inflation that threatened to overwhelm the 6.5% top of the bank's target inflation range. Growth in the money supply that had raced to 17.6% year-to-year in January 2011 and to 18.5% in February gradually slowed to a low of 11.5% in November.

But the bank reversed policy in August, and it now looks as if, with the typical lag, money supply growth is headed up again. It hit 12% year-to-year in December 2011.

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Greenspan had his day, but as he aged, he slipped. 2 0ReportSpamKen101a1 hour agoWhat kind of a title is that, "Time to fight the Fed"? We need an article with the title, "Time to properly regulate all the Republican crooks that ruined the economy in the first place", no? Think my sentiment is incorrect righties? Type Justice Lewis Powell's Blueprint into Google and do a little homework for once. Republican Business Leaders, the Republican crooks on the Hill they own and the US Chamber of Commerce have been following a blueprint for 40 years that has transferred trillions from the middleclass to the rich. Think I'm wrong? Do the homework and get back to me. Then start voting for a party that actually represents you and that's truly NOT the TeaPublican Party..... 14 15ReportSpamSomeone (silversaver) 1 hour ago

Fight the Fed? More like time to abolish it. The "Fed"(more like private bank of Rockefeller) is little more than legalized counterfeiting. Only congress has the legal authority to coin and distribute money. This criminal cabal was started in total secrecy and in 1913 a handful of corrupt congressman during the Christmas recess passed the act and handed it to Woodrow Wilson to sign it into law. Wilson was bribed $47,000 to go along with the scam, but admitted later in his memoirs that with a stroke of a pen he had set in motion the destruction of his country-how prophetic. Since all money that goes into circulation is with interest, the IRS was created at the same time to tax you out of existence to make sure the bankers get their interest back. Did you know that all the income tax collected annually goes right to the "Fed" as interest payment on the national debt? Until this criminal bank is abolished, there will be NO economic recovery and we will continue to be little more than financial slaves to it.

(As an after note the book "the creature from Jekyll Island " documents how this banking cabal

came into existence)

16 2ReportSpamIce Cold Sangria1 hour ago

I'm going out for a smoke, be right back.

7 4ReportSpamjlum2 hours agoShow me the MONEY. Where is all this Money coming from? Where is it going? Do I have a say? 5 0ReportSpamSomeone (pad iowa) 2 hours agoWe will pay a high price for what the Fed is doing a day!!! But the banks are doing great now thanks to the tax payers. 7 4ReportSpamddub19722 hours agoThe Euro is a dead stick. China's next. They've been bundling their bad debt like we were doing before and their collapse is coming. The Fed needs to sit this one out! 9 2ReportSpamddub19723 hours agoThe Fed does not need to pump tons of money in, as in the past. The other countries are doing that for us by cheapening their own currencies. When this happens, the dollar grows stronger and money starts to come into our markets. You want a good year in the markets, stop thinking your going to get rich overnight, buy in stable companies that supply a strong history of dividends. Pray the Fed doesn't pump all kinds of cash in, let the other countries do that. 8 1ReportSpammarkscastle3 hours agoIt`s all going to fall apart sometime soon.When is anyones gess.But the banks of the world are going to fall in a dust clowd. Pulling a few tricks along the way will only serve to make the fall harder. Don`t take out loans ,pay your loans off and stop using credit ASAP ! Don`t invest in Stocks or bonds they aren`t worth anything ,just paper! Stock up what goods you can and start helping family members out where ever you can. Move out of cities and look for cheep land and pay cash for it. Pay it all off! 16 2ReportSpamTarzan6463 hours agoPoliticians, Bureaucrats and Economist never consider the "Rule of unintended consequences". The more they try to control and stimulate the economy, the more they screw things up. They need to get out of the way on the economy, and let it sort itself out, that means some people will lose, but that's how the system is supposed to work. 18 1ReportSpamSomeone4 hours agoGreenspan, Bernanke, and Geithner should be exiled to Iran, Iraq or Pakistan. The three of them have done more damage to this country than the terrorists who are trying to destroy us with explosives. 53 1ReportSpamPaolo-Pablo4 hours ago

"Onefungi"

You offer words of stark truth and wisdom.

7 1ReportSpamPaolo-Pablo4 hours ago

Inflation, hyper-inflation and higher taxes are on the way for us all.

There is no "rescue" or "cure" or debt payoff. None of these can be accomplished. So, all nations' leaders will "agree" to create more money and throw it at already old, ancient and toxic debt.

The public will pay the highest price as usual.

29 1ReportSpamRay USA6 hours ago

Jim:

Welcome to the real world. No one can time the market.The fundamentals are that central banks all over the world are inflating their currencies. Hunker down and work vote for reduced government size and spending.

24 7ReportSpamtruthhurts4027 hours agoscrew the fed. screw the banks. 39 2ReportSpamscammic7 hours ago Forget it. People are idiots and junkies no fighting spirits the 1% owns them totally. 20 8ReportSpamProlificPro9 hours agoMaybe they're printing money to cover underfunded Public Employes Retirement fund.(est @ 4 Trillion Dollars)Everytime Public Employees retire in Greece, Spain, Oregon , CA and Europe they cause markets to stumble. Is printing money the only known way to deal with this ever growing taxpayerliability ? Reinvestigate 911 28 11ReportSpamDoug (Out in the cold) 11 hours ago

The Fed has two policy objectives .. control inflation and unemployment .. in guidance to make the monetary decisions. Congress and to a degree, the Administration, set fiscal policy that simulates or retards private sector growth. The dysfunctional Congress that we have had lately has retarded both public and private sector employment and risk of financial default of America.

I don't think the American voters are going to forget the political chaos of with this Congress.

20 15ReportSpamAtroponic11 hours ago

Yes, pump up financials and the market while inflating our hard earned $ into oblivion. Wall Street benefits while Main Street sucks eggs as The Fed continues with financially suicidal policies for the average taxpayer.

My poor dollar is now worth less than the linen it's printed on.... :(

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$.dap("&PG=INVIHP&AP=1089",300,250,"dapAd2");FeedbackRECENT QUOTES/*WATCHLIST/*Is this flood of cash enough to push stocks higher in 2012 -- no matter what the real global economy does? Traders and investors have started 2012 by answering with an emphatic "yes." January's rally in U.S., European and emerging-market stocks is based on a belief that the huge wave of cash that the world's central banks have unleashed -- or are about to unleash -- on global economies will send stock markets higher and set economies to growing faster.

If the world's central banks can't pull off a global rescue this time, it won't be because they haven't tried. They've thrown a lot of money -- and I mean a lot of money -- at the global economy.

Why can't the Fed fix this economy?

The European Central Bank has been creating money at a pace that leaves the U.S. Federal Reserve in the dust.

But the bank reversed policy in August, and it now looks as if, with the typical lag, money supply growth is headed up again. It hit 12% year-to-year in December 2011.

Why You Can't Count On Central Banks In 2012

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