The Failed Economic Policy of Money Printing
Monday, November 19th, 2012
By Michael Lombardi, MBA for Profit Confidential
Since the financial crisis of 2008 hit, the main goal of central banks around the world has been to boost lending to businesses and consumers. Their logic: once lending increases, economic growth can get on track. To meet their targets, central banks have cut interest rates rigorously and printed trillions of new units of their own currencies.
But sadly, their plan hasn’t worked out. In an ideal situation, the lowering of interest rates and the printing of money by central banks would have increased the appetite of businesses to borrow, eventually leading to economic growth. By now, shouldn’t the central banks in the global economy realize their plans have failed? It’s not just one country that is facing this problem; anywhere I look, I see similar situations.
For us here at home, the Federal Reserve has announced three rounds of quantitative easing, but business and consumer lending has not increased. Small business lending in September actually decreased to its lowest level in 14 months. (Source: Reuters, November 1, 2012.) On the economic growth front, there is no growth!
The central banks of China and Japan are seeing similar trends in their economies. The demand for loans in the Chinese economy plunged unexpectedly in October. The loans in the local currency were down 14% compared to the previous year. Banks only lent 505 billion yuan in October—economists were predicting 590 billion yuan. (Source: Bloomberg, November 12, 2012.)
The Chinese central bank, just like the Federal Reserve, has taken the traditional approaches to try to boost lending, but they haven’t worked. The central bank has cut interest rates twice so far in 2012 and has changed reserve ratios three times since November 2011 to May of this year—but economic growth in the Chinese economy is still questionable.
Similarly, loan demand in the Japanese economy is so miserable that it is dragging the country back into recession. Gross domestic product (GDP) in the Japanese economy contracted 3.5% in the third quarter (on an annualized basis) compared to the previous quarter. (Source: The Japan Times, November 12, 2012.) From 1997 to 2011, bank loans in the Japanese economy have fallen 13.5%. (Source: Financial Times, October 25, 2012.) The central bank of Japan’s actions of slashing interest rates and printing paper money has clearly not worked.
I wonder how long it will take central banks to realize that their traditional monetary stimulus actions do not work. For economic growth, you want consumers to feel confident and spend. You want to see their wages increase. Right now, none of that is happening. Central banks are simply failing at their plans to stimulate their economies. America is a far cry from where she stood before the credit crisis of 2008 hit.
The stock market rally that began in 2009 is witnessing its demise. Looking forward, there is more bad news than there is good news for the key stock indices in the U.S. economy. Reality is kicking in for the markets.
Fundamentally speaking, key stock indices are becoming weak at a quicker pace than some may have anticipated. Companies that are constituents of these key stock indices are struggling to keep their earnings growth. Firms across different industries in the U.S. economy are showing concerns about current economic conditions and warning investors about possible hurdles along the way. This is something I have been warning since the summer stock market rally kicked into high gear—earnings growth, the most important factor of a stock market rally, simply isn’t there.
Similarly, looking from a technical analysis point of view, the key stock indices are gaining momentum towards the downside—and it is happening quickly. Since the beginning of September, key stock indices in the U.S. economy have been generally trending lower. They gave up significant amounts of gains that were produced during the stock market rally in the summer of this year. Since mid-September, the Dow Jones Industrial Average has fallen 6.4%, the S&P 500 has declined 6.6%, and the NASDAQ Composite Index decreased 9.4%
In recent development, key stock indices, like the Dow Jones Industrial Average and the NASDAQ Composite, have broken below their 200-day moving averages (MAs). Looking at the charts below, they make me a bigger advocate of key stock indices falling.
Chart courtesy of www.StockCharts.com
Chart courtesy of www.StockCharts.com
When a stock or index falls below its 200-day MA, it is considered to be an indicator of bearish sentiment pouring into the markets. It can also be looked at as the “health index” of the market—if the price breaks below, it means that sellers dominate the market, and vice versa.
The stock market rally that started in 2009 was driven by printing money—and a market can only advance so much on monetary expansion alone. Dear reader, capital preservation is looking to be the best investment strategy right now. Key stock indices are entering very dangerous areas.
Where the Market Stands; Where It’s Headed:
As I have illustrated above, major stock market indices are falling quickly. Will 2012 be a break-even year for stocks? We’ll soon find out. But for 2013, I’m saying all bets are off. We’re in for trouble.
What He Said:
“Over the past few weeks I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy, and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in Profit Confidential, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying “the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”