Forget about ‘Do not fight the Fed’. It’s more like don’t fight any central bank on the planet! The fear of central bank interventions have permeated our brains once again, and it is that fear that seems to be pushing most investors/traders back into ‘risk on’ mode. This past week, China cut rates and lowered reserve requirements, the sixth such move this year. China also removed the cap on bank lending, a further move to deregulate interest rate policy.
The prior day had an ECB meeting where Chairman Draghi ‘hinted’ further stimulus was coming down the line. That started a massive rally on Thursday and pushed into the end of the week. Bears have been torched by three weeks of massive gains and little/no give back. Some are even looking for new all time highs before the end of the year.
What is all this stimulus about? Certainly money flowing into the system is the key to increasing asset prices, the definition of inflation is ‘too much money chasing too few goods’. The more liquidity available without other ‘meaningful’ alternatives for return the more stocks are bid up, creating endless bull market rallies (or that is the perception). Of course, that is not the way it should happen. In a perfect world, economies grow and cycle through booms and busts.
But as we’ve noticed since 2009 monetary policy has been a focal point, central bankers are very afraid to let their economies slip into a bust cycle (for fear of going into the abyss). This of course is absurd and will eventually hurt world economies in the long run, but let’s be very clear: central bankers do NOT look at a clock, and therefore can string out accommodation for as long as they wish.
Is this fair to market participants? Wrong question. It’s better to ask how we can take advantage of the situation, seek high probability trades and grow our accounts. We are not setting policy for governments, but as stated before liquidity is king. Fight the giant money hose of a world of money easing and eventually pay the consequences. Aggressive monetary policy may be wrong, but it exists in world markets, and stock prices will continue to rise as long as that is the protocol.