The Giant Battle Between Financial Markets and Governments

The worst you can get from a government is tyranny. Tyranny comes in many forms, such as excessive taxation, reckless foreign wars, and persistent legislative attacks on individual liberty by psychopathic political meddlers. The best you can hope for from any government is that it’s so shambolic and disorganised that it inadvertently does the best thing possible, which is absolutely nothing! In that spirit, we begin the final reckoning of the week in praise of Australia’s Labor party!

May it continue to do nothing, especially if it’s going to do it in such an entertaining and comedic fashion. The conventional wisdom is that financial markets don’t like uncertainty. But if markets could be sure that the government would be paralysed by stupidity from now until September, well then we’d be off to higher highs for sure. A government that does nothing is surely better than a government that tries and fails at everything.

For the stock market, the political theatre is a sideshow anyway. The main act in financial markets is still ‘Helicopter’ Ben Bernanke. The man’s largesse knows no bounds. The Fed will keep buying $85 billion a month in Treasury bonds and mortgage backed securities, according to the statement released after its meeting earlier this week. Long live the punchbowl! May it be ever bottomless!

The Fed said the US economy has strengthened ‘moderately’ but that unemployment remains too high for its stimulating policies to be removed. The trouble for the Fed – and for any central bank really – is that when you try to create inflation, you can’t control what people do with the money and credit you’ve made possible. It never goes where you want it.

For example, the S&P 500 is up 130% since the diabolical low of 666 in March, 2009. Its rise has added $10 trillion to the value of US stocks. On paper, US households are richer. And unlike the market top in 2000, this near-top (the index is still a few points below an all-time high), was a broad-based rally. It wasn’t only the financial sector or the tech sector leading the index higher. It’s been a genuine rally in stocks as an asset class.

That’s what you get, though, when you crush bond yields and force savers to take risk. The Fed – like the Bank of Japan – wants to get cash moving in the system. You do this by buying up so many bonds that yields fall and otherwise conservative investors abandon caution and jump into the rally. The question now is when the rally ends. How much money is still on the sidelines?

What’s interesting is whether the Western world will go broke before the developing world has a chance to get rich. Over in Cyprus, the authorities have come up with a new plan to recapitalise the banking system and stave off depositor flight. The latest plan is to restructure the problem banks (all of them) into good banks and bad banks.

By moving all the bad assets (mostly Greek government debt) into the ‘bad banks,’ the Cypriots can restore liquidity from the European Central Bank (which was cut off on Thursday) and recapitalise the healthy bank so it’s less exposed to catastrophic losses. And donkeys might fly.

Cypriot banks remain closed. And part of the plan includes restricting all non-cash transactions, freezing all cheque cashing, and limiting withdrawals from banks. Withdrawals are already pretty limited, given that the banks haven’t been open since March 15th and aren’t scheduled to open any time soon. You can’t open the banks until you’re sure you can prevent a bank run. But the longer the banks remain closed, the more likely a bank run will result anyway.

It’s not good news for the people of Cyprus. What it means for the European Union is less certain. In principle, this shows that restructuring bad debts is not a real solution, especially when the assets in a banking sector dwarf the resources of a government. It also shows, in principle, what all governments will do when push comes to shove; namely confiscate your money or make it impossible for you to move it across borders and into a safer currency or store of value.

But hey, the S&P 500 is near an all-time high, so why worry?!

And while we’re on the subject of festering fiscal problems that you ignore in polite company, how about that extra $32 billion Wayne Swan will have to borrow in the next two years, according to analysis by RBC Capital Markets? Australia’s fiscal deficit, once non-existent, keeps growing to new and ‘unexpected’ heights.

RBC says the Australian Office of Financial Management (AOFM) will have to issue $16 billion worth of new Commonwealth debt in each of the next two years. The borrowed money will paper over the fact that this year’s deficit is likely to be around $20 billion, instead of the $1 billion surplus the Treasurer first promised last year.

What’s worse is that lower commodity prices than ‘expected’ and lower tax revenues are leading to larger deficits than ‘expected’. Expenses have increased but national income has not. That is not a good formula if you’re trying to keep the nation’s fiscal house in order. If you love spending other people’s money though, we suppose it’s a sign of success.

The rising government debt may actually be good news for investors, at least in the short-term. Because the Reserve Bank of Australia doesn’t look like lowering interest rates much more, foreign investors may continue snapping up high-yielding Aussie assets. And with new Bank of Japan governor Haruhiko Kuroda committed to inflating new bubbles in Japan through a weaker Yen, we’ll have to see if the Aussie dollar/Yen relationship maintains its correlation with the ASX/200.

Yes. It’s all happening now. But what? Well, that’s the question, dear reader. It’s a giant battle between financial markets that want to deflate and central bankers who want to prevent that. So far, the central bankers are winning in some markets and losing in others. How does it all end? Stay tuned.

Regards,
Dan Denning
for Markets and Money

Join me on Google Plus

From the Archives…

Learn How to Play the Rules Game to Cancel Your Mortgage
16-03-13 – Nick Hubble

Seven Situations to Watch in the Pacific Currency War
15-03-13 – Dan Denning

Why Copper Doesn’t Like the S&P500
14-03-13 – Greg Canavan

A Crazy Warning Sign for BHP and CBA Shareholders
13-03-13 – Greg Canavan

Hugo Chavez, RIP
12-03-13 – Bill Bonner

Free report reveals:

10 ‘Big Money’ Mining Stocks for 2017
Markets & Money Free ReportAfter eight years in the doldrums, Aussie mining stocks are making a stunning resurgence. In the last year alone, the S&P 300 Metals and Mining Index is up 50%.

As resources analyst Jason Stevenson explains in his free report, this could be your final shot to pick up cheap, quality mining stocks before the commodities comeback kicks into overdrive in the months ahead.

Download this free report right now and discover:

  • Ground Zero for Mining Boom Part 2: This ‘wild card’ nation could spark the next iron ore boom as early as 2017. Government officials are signing deals to build 100 new mega cities over the next five years. Jason calls this nation the ‘new China’. And you’ll learn the stocks most likely to profit from it.
  • Why the Aussie Resources Boom Will Last another 18 Years: If you think the days of striking it rich with Aussie resource stocks are gone…you’re dead wrong. Jason reveals why the new resources boom — set to kick off in 2016 — will last until 2033.
  • The Top 10 Aussie Mining Stocks to Buy Now: These 10 quality Aussie miners are trading at fire-sales prices. This could be your last chance to buy them so cheap. Load up now and you could make a small fortune over the next two years…

To download your copy of The Top 10 Australian Mining Stocks for 2017, take out your free subscription to Markets & Money. Simply enter your email address in the box below and click ‘Send My Free Report’.

We will collect and handle your personal information in accordance with our Privacy Policy.

You can cancel your subscription at any time.

Leave a Reply

2 Comments on "The Giant Battle Between Financial Markets and Governments"

Notify of
avatar
Sort by:   newest | oldest | most voted
slewie the pi-rat
Guest
the psychopathic meddlers do a bit0’psy-ops and propaganda here and there, also… oh, and they run “education”, where feminism + evolutionism + globalism = T.R.U.T.H. “a giant battle between financial markets that want to deflate and central bankers who want to prevent that”? where? just kidding. i can see & share the POV, but in slewienomics, the criticality focuses on “keeping the checks in the mail” as the true basis of what is left of “legitimacy” and yes, there would be a few moral issues there, but feminism and evolutionism and globalism seem neither to have remarked nor learned that… Read more »
Merv Nash
Guest

All Wars are banker’s wars. Interesting video.
http://www.youtube.com/watch?feature=player_embedded&v=5hfEBupAeo4

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au