What will more central bank stimulus do for the economy?
I just listened to an interview with respected global strategist Dr. Komal Sri-Kumar; here's his take on the efficacy of central bank stimulus:
"What does it do for the economy? It doesn't do much. I always make a distinction between structural factors and monetary factors. After 2008 the Fed did quantitative easing three different times and increased the balance sheet of the Fed from $800 billion on Lehman day, 9/15/2008, to a high of about $4.5 trillion; more than five times as much. What did it do to wage increases? They have remained pedestrian. In fact over the past year the real wage increase for the average American wage earner is, guess what, zero -- no real wage increase. And the economy has been on a slowing trend. It's not as if the economy is booming, and that gives you a valuable lesson that the Fed hasn't learned in 11 years of implementing policy; which is, a structural problem cannot be cured by monetary means.
Today, we are trying to deal with a structural problem, coronavirus, through monetary means -- cutting of rates and quantitative easing -- it simply is not going to work. What you need is to do something with the disease, not on the monetary side."Beyond the coronavirus, Sri-Kumar's statement speaks to our view that at this stage of the cycle central bank stimulus has pretty much run its course -- when it comes to the real economy, that is. Ah, but when it comes to the stock market, central banks can absolutely keep things afloat... well, till they can't.
Sadly, however -- and this is inevitable -- the present destinations of all the easy money, the equity and the credit markets, will ultimately (don't know when) have to come to grips with the fact that the underlying economy (the fundamentals) nowhere near supports their lofty levels and massive debt service obligations. That, alas, is when unsuspecting investors get hurt, badly.
It's the inevitability of the business cycle...
Last Sunday evening I reported that the Dow future contract was down 340 points, and I suggested that it should've been lower (turned out to be). Tonight, as I type, the contract is up 270 points (was down 600 this afternoon), and if Bloomberg strategist Mark Cranfield has it right, it should be higher -- because it's all about central banks coming to the rescue:
Smell of Coordinated Central Bank Action Lifts Stocks
"There is a stunning rebound going through equity markets, led by S&P 500 futures which have risen into positive territory after being down as much as 2.1% in early business. The BOJ liquidity injection puts flesh onto the case for a coordinated central-bank response. Before the day is complete, there could be members of the ECB and Fed adding soothing words."Remember, there's no macro fix here, just juice for stocks -- which, in our view, is not an investable thesis...