Markets soar, but has anything changed?
Whoa! The Dow rose almost 500 points yesterday. Whoopee! Hallelujah!
It was like the Second Coming on Wall Street. As if He walked across the East River鈥nd announced it Himself:
鈥淭he fix is in.鈥�
But it was not the sacred that spoke yesterday. It was the profane. The world鈥檚 central banks, to be precise. They got together. More like a meeting of mobsters than a gathering of the gods. They made it clear.
You want money? You want cash? You want something you can take to the bank? Well, you鈥檝e got it!
鈥淎 move by the world鈥檚 central banks to lower the cost of borrowing exhilarated investors Wednesday,鈥� the Associated Press reports, 鈥渟ending the Dow Jones industrial average soaring 490 points and easing fears of a global credit crisis similar to the one that followed the 2008 collapse of Lehman Brothers.鈥�
It was the Dow鈥檚 biggest gain since March 2009.
Large US banks were among the top performers, jumping as much as 7 percent. Markets in Europe surged, too, with Germany鈥檚 DAX index climbing 5 percent.
Wednesday鈥檚 action by the banks of Europe, the US, Britain, Canada, Japan and Switzerland represented an extraordinary coordinated effort.
But amid the market鈥檚 excitement, many doubts loomed. Some analysts cautioned that the banks鈥� move did nothing to provide a permanent fix to the problems facing heavily indebted European nations such as Italy and Greece. It only buys time for political leaders.
鈥淚t is a short-term solution,鈥� said Jack Ablin, chief investment officer at Harris Private Bank. 鈥淭he bottom line on any central bank action is that it papers over the problems, buys time and in some respects takes pressure from politicians鈥� If nothing鈥檚 done in a week, this market gain will disappear.鈥�
Banks stocks soared as fears about an imminent disaster in the European financial system ebbed.
But wait.
What has really happened? The central bankers have given out the word that they鈥檒l print up as much money as necessary. So what鈥檚 new? Haven鈥檛 they been doing that all along? What is lending at zero interest rate? What is buying the government鈥檚 debt? What is taking the toxic bonds off the banks and brokerage houses?
What is really new? Not much.
You remember our advice, dear reader? Sell stocks on rallies. Well鈥hat are you waiting for?
And if we were speculators we鈥檇 be selling stocks鈥ven stocks we didn鈥檛 own. Because we have here an opportunity. The market is rising on hope, not on reality. And today, it might rise a bit more鈥�
鈥ntil it finally realizes that there is no really good reason to be so bullish.
Stocks are bits of businesses. And businesses do not make more money just because the central banks print money. If this were not so, a few years ago, Zimbabwe鈥檚 companies would have been the most profitable on earth. Under the leadership of Gideon Gono, the central bank of Zimbabwe was printing up trillion-dollar notes and handing them out all over town. Trouble was, you couldn鈥檛 even buy a cup of coffee with them. In fact, you couldn鈥檛 buy a cup of coffee anyway鈥he whole economy was in such disarray nobody could get any coffee. Or anything else.
That was at the end. At the beginning money-printing works miracles.
But businesses do not operate in the realm of the mysterious or the sacred. They are remarkably down-to-earth undertakings. They鈥檙e real enterprises with real revenues and real expenses. They make money by selling goods and services. And, taken all together, they only make as much money as the economy itself allows. In other words, it鈥檚 not possible for all the businesses to do better than the economy that supports them.
So, now we can ask you a question: will the economies of the world鈥檚 countries do better, now that the central banks have announced they will print more money?
Or will they do worse?
It鈥檚 hard to say. But by our reckoning, the world is in the grip of a major correction. Among the things the correction is likely to correct is the money system鈥n which central banks have the power to create 鈥渕oney鈥� out of thin air.
Would the correction correct something that didn鈥檛 need correction? If central bankers refused to print money there would be no need to correct them, would there? So this latest announcement just confirms what we thought all along.
Printing money is easier than raising taxes. It is also easier than borrowing鈥specially when lenders get wary. All that stands in the way is the integrity of the central bankers themselves.
Looks like that just gave way鈥�
Bill Bonner
听蹿辞谤 The Daily Reckoning
