The most prevailing question with economists is whether a financial contagion has spilled into Western Europe because of low interest rates. If European banks are not making money with zero interest rates, then what are the financial casualties associated with low European growth in sustaining higher real estate prices and higher stock prices?
Mario Draghi believes recapitalization and monetary easing are efficient solutions in preserving the systematic sustainability of the European Union. What Draghi fails to understand is that global financial markets have become a rigged game. Geopolitical events and casualties are only used as a tool for the US Fed to intervene into the market at any given time.
The Financial Times reported and identified that $29.1 trillion in market investments into the stock market are held by 400 public institutions in 162 countries. This is the problem, banks are not making money and they’ve expanded into the trend of the equity market. Perhaps the central bankers now believe that they’re invincible and that the Dow Theory doesn’t exist for them anymore? The central banks can no longer come to terms with greed or repentance.
The boundaries are being pushed further. The central bank’s subconscious and the Dow Theory are not registered as a subliminal whole. Central bankers may not realize the Dow Theory’s inexplicable compulsion of the survival of the fittest. The central bankers have done the unthinkable: they have dwelled too long in the elusory pursuit of liquidity without consequences. This has become a collective dysfunctional environment because it falsely establishes a continuous rising market.
How can this be proved? One must examine China. For some reason, they’ve established a yo-yo market syndrome of stupidity. One report from the People’s Daily of China highlighted a market insider warning, “High leverage will inevitably bring about high risks which could lead to a systematic financial crisis, negative economic growth, and could even wipe out people’s savings.” The article from the People’s Daily of China mentioned that strong stimulus programs must be avoided or else the situation would become worse in the long-term. This article was published on May 10, 2016.
On August 17, 2016, Moody’s investor services raised its forecast for Chinese economic growth in the wake of a “significant” stimulus policy. The reason why China chose to introduce a “significant” stimulus policy is because of Japan’s decision to pull the trigger in injecting more steroids into their own market. That means global stock prices at any given time do not properly reflect accurate estimates and intrinsic value.
The analyses become useless and benign. When analyses become useless, they randomly and covertly raise global markets without profiting. This gives the central bankers the appearance that they have a solid balance sheet.
This can be proved by Draghi’s words, “Italy’s troubled banks are in exceptional circumstances, we want to avoid fire sales”, he mentioned referring to the banks’ forced sale of assets at cheaper prices because of the lack of a functioning market. Draghi added that there was room with existing EU rules to provide support. Draghi and the Chinese central banks personify the yo-yo syndrome. It wasn’t a surprise the Italian banks rallied after Draghi’s statement.
However Gilles Moec, a European economist for the Bank of America stated, “It is quite clear in Draghi’s mind that the Italian banks matter a lot more than Brexit”. The Deutsche Bank said it best, “Stop easing, you are crushing us.” The EU laws state that aid does allow governments to invest in companies or banks if they can prove that rational investors would do likewise.
The next question comes to the financial institutions who hold $29 trillion in equities: are they trading amongst themselves or desperately trying to find a rational investor? The central bankers’ assets operate in the present tense whereby the cost of suppressing a memory becomes too damaging to their balance sheet. When central bankers lie to themselves, they believe in their own lies and fail to recognize the truth.
In the end, the Dow Theory will not be circumvented by the indulgence and influence of a few central bankers who believe they are invincible. Central bankers don’t get that stock price efficiency is not sufficient for economic efficiency. The link between stock price efficiency and economic efficiency is tenuous as the implication of the Dow Theory is more complex due to the decision of central bankers to play the markets for higher returns.
Global markets are characterized by the simple rule of the buy-and-hold strategy that they believe beats any other strategy based on fundamental value and analysis. Just because Swiss and Danish central bankers took large positions in the stock market doesn’t mean we are working towards global efficiency. The Dow Theory becomes an imperfect tool with greedy central bankers who extract every dollar from a rising market.
If the crowd gets emotional then the institutions will follow with excessive speculation. With $29 trillion at stake, these bankers will use their power at all means in promoting advancing prices as a whole in the global market. A few institutions will have enough animal instinct to make the leap with powerful interests to go against the market promoting a self-inflicted attack providing that more institutions follow them throughout the trend.
Institutional operators have a tendency to follow their instinct of lower-priced stocks that they’re willing to sell at higher prices to unsuspecting investors. It’s too bad the US Fed are restricted to buying US company stocks, it’s only a matter of time before they get into the act and diversify into global equities to keep their momentum going.