So much for my call the ECB would err with a “wait and see” approach. This morning at the ECB meeting, instead of taking a cautious approach in light of the recent improvement in markets, ECB Chairman Mario Draghi went “all in.” From Bloomberg:
Draghi surprised everyone with a crazy, “bankers gone wild” complete panic attack. His new easing program is aggressive in every facet. He cut all three rates. He introduced a new series of TLTROs (long term financing for banks). He increased QE. And most importantly, he expanded quantitative easing to include non-financial corporate bonds.
Do not buy stocks on this news
Although I am not certain it is the time to be short stocks, the last thing I would be doing is buying equities on the basis that Draghi’s policies give an all clear for risk assets.
The desperateness of Central Banks has hit a new level. Kuroda’s recent move to negative rates was initially met with Yen selling and risk asset buying, but it quickly rolled over. I expect the market to also be extremely weary of Draghi’s bold move.
The days of Central Bankers being able to direct their stimulus solely into financial assets are gone. We have entered into a new era where monetary easing will have many other unintended consequences.
Eventually Central Banks will completely lose control of markets, and there will be an epic amount of volatility in currencies and fixed income. In the mean time, be extremely weary of applying old relationships about stimulus being positive for financial risk assets.
All you can do
This raising of the stakes by Draghi makes me more certain we are approaching the point where the wheels come off the bus. Even though gold is overbought, I am buying even more on this news. The printing has gone into full overdrive. Central Bankers are just tossing bigger and bigger blue tickets at the problem. I don’t know what to own except something that is nobody’s liability and has been used as a store of value for thousands of years.
Thanks for reading,
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