Time to Get Real: Part I
In a world where fair value is a central bank veiled enigma it’s frankly a challenge to keep things real, but I’ll have a go at it in what will be a 3 part series covering central banks, the underlying fundamental picture, and a technical assessment of charts. In this part I’ll be covering central banks and putting their actions into context of the realities of a changing world and will aim to address some of the implications.
Part I: Central banks
After years of watching central bankers do their bidding I’ve come to the conclusion that they are the designers of the ultimate Pokemon Go game by leading investors to ever more extreme locations to find little yield nuggets on their screens.
My largest criticism of this game has been that free market price discovery is largely dead and nobody knows what is real any longer, producing a false sense of security as, at any signs of trouble, central banks feel compelled to intervene ever further removing markets from their natural balance. In short: Creating a bubble with devastating consequences we will all end up paying for in one form or another.
For now one may call it a market of pure multiple expansion as GAAP earnings and price have completely diverged in 2016:
Indeed, as earnings have declined since their peak in 2015 we have seen one central bank intervention after another. Just in 2016 alone we have witnessed dozens of new rate cuts, the ECB modified and added to its QE program with QE3 an almost forgone conclusion, Japan added stimulus with the BOJ on track to own 60% of all ETFs in Japan with more to come. China intervened repeatedly, the UK cut rates and re-launched QE as well, and central banks such as the SNB have been busy expanding their share purchases of US stocks.
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