Central Banks Bet The Ranch

 |  Includes: IEF, PLW, TENZ, TLH, TLT, TRSY
by: Thomas J. Feeney

Since the greater than 20% stock market decline in last year's third quarter, the excellent research staff at ISI has chronicled almost 100 stimulative policy initiatives by governments and central banks around the world. That coordinated effort to reverse the worldwide economic slowdown has succeeded in halting the stock market's decline and in boosting prices back to the levels prior to last year's market collapse.

ISI recently reported that for the first time ever the world's five largest central banks were simultaneously conducting aggressive easing operations. In addition to our own Fed's zero interest rate policy and willingness to buy bonds with no liquid market, the European Central Bank has launched its Longer-Term Refinancing Operations and has made virtually unlimited amounts of money available to European banks for three years at a mere 1%. The People's Bank of China has just pledged ongoing Eurozone support and is expected to continue domestic stimulus. Although not directly involved in Eurozone operations, the Bank of England and Bank of Japan have both committed to additional aggressive quantitative easing.

Such widespread coordinated rescue efforts were unknown during 2008's near collapse of the global financial system. Recent central bank actions appear to support legendary hedge fund guru George Soros' contention that the current financial crisis is even more dangerous than that of 2008. According to Bloomberg, Soros characterizes this as the most difficult situation he's seen in his career. Soros says that it's more important to survive this crisis than to get rich.

It appears that the world's central banks are in agreement that the global debt crisis is so severe that they will do what they must to ward off the normal corrective forces of recession. Recent actions are analogous to betting the ranch. All other resources have been spent. They have been forced into the ironic attempt to solve a problem of excessive debt by issuing far more debt.

So far the willingness of central banks to pump massive streams of new money into the system has elicited good feelings and rising stock prices. And there is no way to know how long such positive feelings will remain. However, unless the central banks are able to prevent recessions indefinitely (an unrealistic proposition), eventual economic slowdowns will spotlight the folly of would-be central planners who will be held responsible for the even more intractable levels of debt that we or our children and grandchildren will face in the years ahead. The mature economies of Europe, the United States and Japan have no realistic prospect of growing their way out of this debt morass. The critical questions facing investors are how long central banks can defer the pain, how much they will inflate the debt bubble and on whom the inevitable defaults will fall.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.