I don’t often watch CNBC but Rick Santelli made absolute sense when he tore into US Fed Chairman Janet Yellen over her plan to potentially buy equities to support the market like the Bank of Japan does now. Yellen still will have to get approval from Congress to embark on such a journey but it goes against her statement during the FOMC press conference where she boldly claimed “we’re not a body subject to group think”. Santelli correctly pointed out that price discovery would be ruined by such action.
As we know from Japan’s experience, the BoJ has had zero impact on consumer behaviour by buying equities and ruined market dynamics by becoming the largest shareholder in a growing number of companies. If they keep up the good work Japanese corporate’s will become state owned enterprises.
Going back to the Fed. Last week I wrote that Yellen’s language beggars belief. On the one hand she talks about the faster pace of economic growth all the while the Fed cuts long term and 2016 growth to 1.8%. Not one week later the NY Fed has cut 2016 growth to 1.4%.
Im amazed at how blind markets can be. Equitie markets continue to sustain lofty heights based on slowing aggregate earnings, worsening credit ratings and a complete failure by central banks to restore confidence.
Last report from the ECB showed it took €18 to create €1 of GDP given all their asset purchases. This is the problem. Without money velocity the central banks only highlight to themselves it is the wrong path yet they still watering the lawns with gasoline while smoking.