Equity Benefits From Central Bank Paper Shuffling: The Economy Not So Much
By Staff News & Analysis - June 06, 2014

Record rise for stocks before employment report … U.S. stocks closed at record highs on Thursday, with both the Dow and the S&P 500 advancing further into uncharted territory, after the European Central Bank moved to combat disinflation and investors looked to Friday's employment report. "With the service sector quite strong, I think the jobs will surprise," said Peter Cardillo, chief market economist at Rockwell Global Capital. "The jobs market, unless it's overly strong or extremely weak probably could be less of an event as opposed to today's ECB meeting." – CNBC

Dominant Social Theme: The economy bounces back … Stocks go up. And Wall Street parties on.

Free-Market Analysis: Read the above explanation for why stocks have "made a new record," and one can come away with the idea that the market is being driven by fundamentals like "employment" … along with necessary strategies involving deeply discounted interest rates.

The overwhelming implication is that the market is responding to rational forces as wielded by the good, gray men of central banking. But what's going on, as usual, is a huge price-fixing scheme. Central bankers try anything and everything to ignite economies using equity prices as the fuel and fodder.

It's a crazy system that mostly benefits those who have the wherewithal to stay "invested" in the markets, and that usually means professional investors and the very wealthy. Only after markets have appreciated and ignited do the small fry begin to plunk their money down, and by then it is too late.

It is not too late now, in our view, but eventually it shall be. Markets continue to reach ever more dramatic valuations. The cycle would, in fact, be on the verge of turning if not for the determination of various controlling authorities to drive stocks higher, much higher, as we have often pointed out.

Here's more:

"This was a historic move by a major central bank," Mark Luschini, chief investment strategist at Janney Montgomery Scott, said of the ECB's decision to cut its key lending rate to 0.15 percent from 0.25 percent and the overnight deposit rate to 0.1 percent from zero, as policy makers attempt to fend off deflation in the region.

The added measures that have the ECB offering banks cheap, long-term funding so long as they use it to hike lending to companies were intended to provide "liquidity into the corporate marketplace, where banks have been reluctant lenders," said Luschini.

"Now we're looking at tomorrow's unemployment report. The news cycle only lasts five minutes. The market is anticipating, and I think correctly so, that the jobs number should be good, or somewhere around 200,000 in new jobs," said Paul Nolte, a senior vice president and portfolio manager at Kingsview Asset Management.

"Certainly based on the weekly jobless claims number, the jobs picture looks good," said Nolte of Thursday data that showed fewer Americans filed for unemployment benefits during the past month than at any time in seven years.

It is good to know that fewer filed for unemployment, but contrary to official statements, the US economy continues to be lousy. Unemployment is likely over 20 percent and large financial and industrial operations have been continually, artificially propped up by central bank money flows.

The result: It is difficult to know what companies are solvent and which are not. And this also damps business activity. No one wants to create a partnership with a potential bankrupt.


The ECB has the idea that it can counteract these trends by encouraging lenders, and also by making it more uncomfortable for them not to lend. Here, from the BBC:

ECB imposes negative interest rate … The European Central Bank has introduced a raft of measures aimed at stimulating the eurozone economy, including negative interest rates and cheap long-term loans to banks. It cut its deposit rate for banks from zero to –0.1%, to encourage banks to lend to businesses rather than hold on to money. The ECB also cut its benchmark interest rate to 0.15% from 0.25%. The ECB is the first major central bank to introduce negative interest rates.

Howard Archer, chief UK and European economist at IHS Global Insight said: "Despite being widely anticipated and in some quarters criticised for occurring too late, it is still a bold and unusual move by the ECB to take its deposit rate into negative territory."

"There has to be considerable uncertainty as to how effective negative deposit rates will turn out to be," he added.

The negative interest rate – charging commercial banks to park their surplus funds – is perhaps the most striking element in this package. Negative rates do happen now and then, but they are rare and often a sign of some sort of financial or economic stress.

That certainly applies in this case, where the eurozone economic recovery is weak and risks being undermined by deflation or falling prices. One source of weakness is declining bank loans to the private sector. The negative rate might encourage banks to lend more, but it also imposes a cost on them and so might affect their profitability.

… Mr Draghi said that the whole package of measures was aimed at increasing lending to the "real economy". "Now we are in a completely different world," he said. Even though some of the measures, like the more to negative rates on deposits, were expected European shares moved higher on the ECB announcement.

Mr. Draghi is living in a fantasy world if he believes he is lending to the "real economy." In fact, given the level of regulation and monetary stimulation, markets are elevated far above where they would be if markets were left alone to create valid valuations.

The Wall Street Party continues, as we can see, unmoored from what is actually taking place in larger Western economies. That's because governments and those who stand behind governments are committed to creating a new equity bubble for reasons we have explained many times.

First comes the ascension, and then the downturn. The farther up the marts go, the farther they will fall. If the disaster is powerful enough, the globalists will begin to offer the alternative of an even larger and more centralized system under the self-serving justification that only an even larger structure can create longed-for stability.

This leads to all sorts of peremptory shifts in strategy, abrupt changes in direction as top bankers seek the best way to ignite markets. Rational policies are abandoned and yesterday's rhetoric is simply replaced by different justifications. The controlled mainstream media seems to have little or no ability to reference previous reporting.

Draghi, for instance, has been talking about the "European recovery" for several years. Yet now he takes seemingly desperate measures to try to get money circulating again. He is pushing on a proverbial string.

After Thoughts

Equity benefits from all this paper shuffling and not much else. But perhaps that's the point.

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