It’s The Only Play Central Banks Know

Let’s check out the latest news…

Global stock markets soared overnight (with Australia joining in this morning) on news of ‘coordinated central bank action to boost liquidity in the financial system’.

The US Fed, ECB, Swiss National Bank, Bank of Canada, Bank of England and Bank of Japan have all agreed to work together to ‘ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity’.

These actions would be really helpful if the world was suffering a liquidity problem. But it’s not. It’s a solvency problem. The credit cycle has turned. The world is in a deleveraging phase. But central banks are still trying to reverse the process and provide more credit to households and businesses? They really only have one play in the playbook.

This liquidity jolt is great for short-term confidence. Bankers who were considering a top floor exit now have more time on their hands. Their insolvency can be hidden for a little longer.

In the meantime, speculation gets another lease on life. Banks can now pledge greater quantities of moribund assets in exchange for near costless cash from the central banks. They can then take this cash and punt away.

Is it any wonder gold surged to US$1,750 in anticipation of this torrent of fiat currency looking for a good time?

So enjoy this little rally. It may have legs and take us through to Christmas, allowing lazy financial journalists to dust off last year’s copy and talk about a ‘Santa Claus’ rally – one of the most patronising clichés out there.

But it doesn’t alter the fundamental characteristics of the market. That is, bankrupt sovereigns in Europe, insolvent European banks that own the sovereign debt and probably insolvent US banks that have provided insurance against the Euro banks.

That’s why Bernanke got the central banking club together to down some liquidity shots. He knew the credit freeze in Europe was slowly crossing the Atlantic to the big New York banks. And who’s Bernanke’s daddy?

These actions will only make the bear market grind on, as more and more economic distortions surface from propping up insolvent banks.

And as the bear market continues to grind on, you may want to look into more sound investing options …such as dividends.

Greg Canavan,
for Markets and Money

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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