Tags: China | central bank | stock | debt

Central Banks Lack Creativity

By    |   Wednesday, 10 December 2014 08:26 AM

There is a reason why central bankers never win popularity awards. The lack of intelligent and innovative thinking is appalling and downright embarrassing.

The pioneer of quantitative easing (QE) was the Bank of Japan. While they were not the first ones ever to do it, they certainly have been at it the longest with absolutely nothing to show for it except the utter ruin of their country's economic future.

The United States followed soon after. Not be outdone, they tried to create shortsighted policies and lead with misguided and flawed policies. Sometimes it is hard to believe that they do not understand the consequences of their actions. Unless they are outright lying to us, it is frightening to see how their rooms full of PhD's cannot see the train wreck they are creating.

Well if the U.S. has done their share of damage, why would the European Central Bank (ECB) want to be left out? After a serious bout of rational thinking, ECB President Mario Draghi finally was able to quiet his conscience and enter the dark world of QE. Rumor has it that he may be considering issuing a stimulus of 500 euros per person. This means he will mail a check to all Europeans who have a social security number. While it might not have a dramatic effect in France and Germany, in countries like Greece, Spain, Portugal and Cyprus, it will get him elected as president if he ever stood for elections.

Well, if all these "smart" central bankers are pooling ideas together, why would we not expect the new central bank with clout these days, the People's Bank of China, to stay far behind?

The central bank in China has reduced interest rates. Believing that this will stimulate growth in the economy, they are blindly following the worn-out strategy of stimulating demand. The reality of the fact that this strategy has almost never worked does not deter their demented thinking.

As a result of their misguided move, the Shanghai stock market has shot up by 32 percent in the past six week and by more than 15 percent in the last 12 trading sessions.

The People's Bank of China has also lowered the cash reserve that banks need to keep with them from the 20 percent requirement to 19.5 percent. This has released $81 billion of excess cash into the market to stoke inflation and further speculation.

When Chinese President Xi Jinping took over, he was faced with a nation that had gorged itself on credit. The Chinese debt is at about 250 percent of GDP, which is astronomical. Xi had promised to stamp out speculation by creating policies that would penalize them. After two years of 7 percent growth, his resolve has dissolved and he is now calling shots from the worn-out playbook of the other central banks. He is now promoting additional credit and easy money.

Despite the parabolic move, the price-earnings (PE) ratio of Chinese stocks is at 7, compared with a PE of 19 for the S&P 500. So while it might be risky, the fix is now in. The Chinese stock markets will rise for much more time to come. A smart investor will wait for a slight shaking out of the current run before diving in.

A word of caution to the investor: You need a stomach of cast iron to sustain the 5 to 10 percent stock declines as well as moon shots as you multiply your wealth taking advantage of the insane behavior of the Chinese central bank.

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There is a reason why central bankers never win popularity awards. The lack of intelligent and innovative thinking is appalling and downright embarrassing.
China, central bank, stock, debt
Wednesday, 10 December 2014 08:26 AM
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