Global: Central Banks Pushing on a String

Policy makers are trying everything to stabilize the global financial system and thaw credit markets. But the US economy and other world economies are in bad shape. The central bank efforts are not translating into credit availability for the broad economy. They are pushing on a string. The reasons for not lending are:

• Rising credit card defaults
• Rising unemployment
• Rising foreclosures
• Rising bankruptcies
• Massive overcapacity
  

Here are some charts to illustrate the current situation:

The chart at left shows the efforts of the US central bank to inflate the monetary base; however, the multiplier is falling just as fast. While the FED balance sheet has exploded, the rise in bank reserves is not flowing into the broader economy.
We need to monitor the multiplier for some time to see if there is turn upwards in the near future. Until then the news is not good for equity markets, and says loud and clear: Stay defensive, opportunities lie in the future.







Volatility indices continue at record levels..reflecting high forward looking risk. Despite massive intervention by all Central Banks, Growth outlook is bleak.

The rise of the USD and Yen reflect flight to quality and forced redemptions. For the emerging market economies this is trouble as the currency losses and lack off credit availbility will becoming reinforcing. While Asia has learned lessons from the 1997 currency crises, it seems Eastern Europe is the new batch of students. For emerging market equities,this chart says "stay defensive, opportunities will come in the future".



Despite the massaging of NAV's for month end purposes, and the rise of global equities in the final days of October 2008 be warned that panic has returned full force. All asset classes from equities to commodities are falling. Growth outlook globally is bleak; knock-on effects on employment and consumer spending are just developing. Brief rallies, no matter how powerful, cannot overcome the underlying economy and investor sentiment. We are likely to test the recent lows and have a period of despondency and depression in markets.
This is not good news for equities: Stay defensive and wait for better opportunities.