The World Is Headed for Bear Market Territory

Central banks have created the false confidence that an external force will support markets. But that force has nothing to do with the real economy or global economic conditions. Central banks’ main purpose now is to sustain the larger private banks and financial players while providing markets the boost they need to pretend the economy’s healthy.

The world’s major central banks — the Federal Reserve, the European Central Bank, the Bank of Japan and the People’s Bank of China (to a lesser extent) — have been coordinating to reduce the cost of money to add artificial liquidity to the system.

That’s all been done in an unnatural manner, and not because of real global growth. These central banks provide the artificial money injection markets need through quantitative easing, low interest rates and currency wars.

They also use underhanded currency swap agreements in which one central bank gives money in a swap form to another central bank. In that fashion, they can make their currency look weaker or stronger, depending on their current requirements.

It’s bolstered stock markets and pumped more debt into the bond markets — both in corporate and sovereign bond markets. Public debt-to-GDP ratios have also increased throughout the world. In today’s globalized markets, everything is connected.

What’s so unusual about this epic new era is that it’s all legal, and by now it almost seems natural. But my latest research has demonstrated how the central banks, though always powerful, are significantly more powerful than ever before. They’re altering the foundations of finance and economics globally.

The global economy is more interconnected than ever. One of the reasons it’s important to look at this international interdependency is because it looks like the U.S. could be entering a bear market. And that would have a global impact. We’re no longer in a world where one market or one economy can go down while others remain relatively unscathed. When the Fed sneezes, global central banks get a cold.

Last year, I told interviewers that we were transitioning to destruction. I said we’d see lots of volatility and that it would increase. We’re seeing that now. A lot of instruments these central banks have used and continue to use are reaching their limits. They may be able to buoy stock markets day to day, but they won’t be able to keep them up for long.

Regards,

Nomi Prins
for The Daily Reckoning

P.S. Be sure to sign up for The Daily Reckoning — a free and entertaining look at the world of finance and politics. The articles you find here on our website are only a snippet of what you receive in The Daily Reckoning email edition. Click here now to sign up for FREE to see what you’re missing.

The Daily Reckoning