Central Bankers Losing Control, Now Bad News Is Actually Bad News.

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Among the many themes we might pick for the market turmoil – energy, margin debt retreating, currency gyrations, emerging market disarray – the one that will be the most punishing is when people lose faith in central bankers to control the markets and steer certain outcomes.

As I noted in a recent piece:

However, there’s a new fault line that’s opened up and it’s quite serious. As we’ve noted previously, the immediate reaction to Japan’s negative interest rates was for the share prices of Japanese banks to get crushed (even as the rest of the Nikkei spiked upwards, briefly).

The big banks are increasingly unhappy and the already-wounded Deutsche bank is even angrier:

[article on DB]

Ah. Now we’re getting somewhere. A schism has finally appeared. A fault line that could lead to real change; quite possibly, disruptive change.

This emerging friction is between the big client banks and the central banks. They are no longer on the same page. Self-interest and self-preservation have reared their ugly heads, as they always do when the financial system is placed under stress.

Central bank policies are now crushing the big banks and the little people alike, so now they finally care. The gravy train for big banks is over.

(Source)

This idea of s schism between the big banks and the central banks is really a very big deal.

I’m not sure where the Bloomberg journalist got this idea, but it’s focusing on a really important theme:

Stock Rout Deepens, Bonds Jump as Faith in Central Banks Falters

Feb 10, 2016

Financial markets are signaling that investors have lost faith in central banks’ ability to support the global economy.

U.S. stocks joined a rout that has global equities poised to enter a bear market, as investors ignored Janet Yellen’s signal that the Federal Reserve won’t rush to raise rates in the face of market turmoil. A selloff renewed in risk assets from bank shares to crude oil and emerging-market currencies. Lenders led European stocks toward their lowest since October 2013.

It’s even worse than “investors” (speculators is the correct term) losing faith in the ability of central bankers to support the global economy, they are beginning to lose faith that the central bankers can support the asset markets.

That’s the major sin at the moment.

So – poof! – just like that several years of ‘gains’ in the stock market have been wiped out. And there’s more to come until and unless the central banks intervene and give the junkie another big fix of monetary heroin.

Which will, by the way, only makes things worse over the long haul even as it shores things up for a while.

This next quote from the above article captures the sentiment well I think:

“Over the last few years when we got bad news, equity markets would rally because they would interpret this as potential for central banks to go more dovish,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment bank unit in London.

“Now that correlation is shifting to bad news is actually bad news. Investors are concerned over central banks’ policy options given the market is driven by factors over which they have little or no control.”

Yes, now bad news is actually bad news. Just like it used to be and arguably should be. This whole fixation on the Fed, et al., cajoling and pumping markets ever higher and “doing whatever it takes” will be more widely recognized as being utter intellectual rubbish that has caused and will continue to cause major economic, monetary and social damage.

Chris

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