Central bank game of musical chairsRound and round it goes, where it stops, nobody knows…

Just when the markets thought that the global economy was out of the woods, and central banks could start to consider raising rates and tightening monetary policy, the Chinese economic downturn is pulling central banks back into the quantitative easing game, or quagmire (because it worked so well in Japan).  The central bank game of musical chairs keeps going, round and round.

Bloomberg reports, Just when central bankers thought they were headed out, they’re getting dragged back in.  Even with their toolkits depleted, monetary policy makers are gearing up yet again to counter the disinflationary fallout from slumping commodities and China’s slowdown.

That leaves investors increasingly predicting that the Federal Reserve will slow its campaign to raise interest rates and that the European Central Bank and Bank of Japan will soon deploy more stimulus.  “Markets are sitting there hoping central banks will solve all,” says Nikhil Srinivasan, chief investment officer at Italian insurer Generali, whose assets total 480 billion euros ($520 billion).

Seeking Alpha writes this morning, The Federal Reserve always planned to pause after raising interest rates in December, but the questions now remains how long that break will last. Initial expectations were that the Fed would raise rates again this March, but a downturn in the equity markets, strong dollar and weak inflation have led some to predict that another move may be months away.  

ECB president Mario Draghi came out swinging late Monday, stating that the central bank must fulfill its inflation mandate in order to maintain its credibility. “Time and again, the critics of our decisions have been proved wrong…but what I never hear them discuss is the risks of doing nothing.”  It seems that Draghi agrees that more stimulus should be added to fix the markets at all costs.  

The ‘Greenspan Put’ is now becoming a central bank oldie but goodie.  Markets now expect central bankers to ‘stimulate’ whenever there is market stress, no matter where it comes from. The problem of course is that we as investors now expect the central bank white horse to come save us any time there is risk of losing serious cash.  Everyone knows in the back of their minds that this is unsustainable long term.  Western developed nations are on average approaching one hundred percent of gross domestic product in terms of sovereign debt levels.  Western central bank balance sheets have exploded in size to record, unheard of, levels.  

China’s central bank is obviously injecting size into the markets to calm the storm.  I’m not so sure it will work.  The Bank of England is reported to be becoming more dovish.  Analysts are betting that the Bank of Japan will add to its already bloated stimulus programs when it meets this week.  

Renowned investor, Paul Singer, seems to see the big picture clearly, saying investors are paying the price for too many years of free money.  “Markets have been distorted by QE,” Paul Singer, the billionaire founder of $27 billion hedge-fund firm Elliott Management, said in an interview. “So there’s a possibility of a kind of tectonic shift if bond and stock market investors lose confidence.”

We may be seeing just that.  Perhaps the markets are telling us that the game of musical chairs is about to end.  Markets are a natural leading indicator of future economic performance. Obviously they are trying to tell us something.  The game of unlimited debt, free money, and unlimited money supply growth may be coming to an end.  The question is, will we be left with a seat or not?  Round and round she goes, where she stops, nobody knows.  


L. Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience.  He is also an author of historical fiction thriller novels.  His first of several books, Currency, deals with the consequences of overwhelming sovereign debt.  He is a contributor to many media outlets and is a foreign correspondent for Newsmax TV.  LToddWood.com