“Power tends to corrupt, absolute power corrupts absolutely”, a statement made by Lord Acton that is the main reason democracies tend to separate powers, including the power to manage a country monetary policy, hence the advocated Central Banks independence from the government. However there were always attempts of interference, but none so effective as many analysts believe Trump is doing at the cover of an hyper ventilated trade war rhetoric, which is the main reason for the FED to have changed its mind from hawkish to a rate cuts cycle, like the president “demanded” during 2018.
Trump, who recently criticized China´s Central Bank control by the Asian country president. Now, apart from the obvious political pernicious side effects from that kind of power in a chief of state, traders need to take into account that in today’s world Central Banks are weapons of mass control, or manipulation, with more than the equivalent of the U.S GDP in their balance sheet, keeping money cheap and accessible, at the same time monopolizing some traditional fixed income markets and even more boldly, like the ECB, capturing a part of the private debt sector.
Photo by Emily Morter.
So, why is it so bad? Well because money needs to keep “moving”, in order to capitalize, which at the end of the day, given the huge liquidity bubble, means once safer oriented capital like fixed income needs to find a new home and so on. It is leading to a technical support in some asset classes, for example, usually when stocks drop heavily, capital rotates to bonds, sovereign or triple A bonds. The problem is that a huge chunk of that market is either demanding yields to sell bonds to investors, like the German government bonds, or paying little money in the private arena, effectively reducing the space or the will for investors to dump stocks.
It’s not yet clearly how much bogus support this unprecedented liquidity bubble made in Central Banks,but it is constraining the stock market. Only time will tell when the economic data reflects a recession, however one thing is clear, Wall Street sits now on its longest bull market in history. Therefore, it’s a new world where shorts in the broader market are not so obvious has they once been. There are other nuances that a trader needs to take into account, meaning, are central banks actions effectively stopping a real market correction?
