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Conditions Of New Bull Markets: Monetary Policy at Trader’s Narrative

According to Jim Stack of Investech Research, there are a few conditions which must be met before a new bull market can be born. They are a mix of monetary, technical and sentiment measures. I’ve looked at four of them already:

Here is the fifth: monetary policy. Of course, almost every single central bank around the world has reduced interest rates. Here is a quick summary of a few key ones:

US Fed
The intended Fed funds rate stands at 1% but the problem is that the Federal Reserve took its sweet time in lowering interest rates. Rates topped out in June 2006 at 5.25% and were taken down by the Fed subsequently. But as the bond market repeatedly was warning, the Fed was behind the curve by a very wide margin.

The US is also undertaking a gargantuan multi-trillion dollar fiscal stimulus package with a much more comprehensive one waiting in the wings until January 20th 2009 when Obama takes over.

Almost one full year ago, the Canadian central bank began its easing cycle and I wrote that since central banks move in packs, this was the beginning of a world-wide trend.

The Canadian central bank has since lowered interest rates continuously. The overnight rate has almost halved from 4.5% to 2.5%. The next meeting in early December is seen by almost all as another opportunity to cut further.

The Chinese central bank announced a massive 108 basis point cut in their key interest rate today (to 5.58%). While this is their fourth time cutting rates since September, this recent move shows just how worried the Chinese government is. Usually interest rates are stepped up or down by just a 27 basis points but this move is four times larger in magnitude.

China has also announced a $590 billion fiscal stimulus package as well as lowering the reserve requirements for several banks to pump more money into their economy. Right now, putting money into a bank account is a losing proposition since the latest data has inflation at 4% and banks pay 2.5%. Basically, China is pushing its people to consume, rather than save.

The Bank of England is no stranger to large rate cuts. At the beginning of November, it cut 150 basis points off its key lending rate (from 4.5% to 3%). That followed a 50 basis point cut in early October 2008. Most are expecting another cut next week when the monetary policy committee meets. Some are even calling for a further 0.50% cut.

England is also pushing forward a VAT reduction (to 15.0%, from 17.5%), and a $30 billion stimulus package.

European Central Bank
The ECB has been the most sluggish in responding to the current decline in economic activity. They are under pressure in their next meeting of December 4th to take drastic action and lower by 50 basis points. But considering the extremely hawkish tone of the ECB that is very unlikely.

The ECB has already cut 100 basis points since October to bring their rate to 3.25%. But as the Eurozone faces its first recession in 15 years, it may not be enough.

The Reserve Bank of Australia topped up its rate in March 2008 at 7.25% and ever since has been lowering it. On October, it also cut 100 basis points and more recently, by 75 basis points to bring the target cash rate to 5.25%. This is the steepest cut in rates since the 1991 recession in Australia. And it may just help them to dodge most if not all of the fallout.

The Australian government is also implementing a stimulus package of $6.7 billion - helping first time home buyers and pensioners.

In its most recent decision, the Bank of Japan held interest rates steady at 0.3% (not a typo). They are reluctant to return to the zero interest rate policy they adopted between 2001 to 2006 because it was not that helpful. But the Japanese central bank is pursuing alternative ways of pumping money into their economy. For example by accepting a wider assortment of assets as collateral.

Warm up the helicopters!
At this point, all central banks are focused on the present battle against the very real danger of a deflationary spiral. Of course, if they overdo it, as they almost always do, then they have to quickly mop up the extra money sloshing around the world financial markets without causing another dramatic downturn.

Don’t you just love central planning comrade?

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2 Responses to “Conditions Of New Bull Markets: Monetary Policy”  

  1. 1 Russ Abbott

    I just looked at your Coppock Guide page. Is there really that much of a difference between the average of the 14 and 11 month percentage changes vs simply the 12 or 13 month percentage change? I would think they would be about the same. That would make is similar to a monthly MACD.

    How is the Coppock Guide doing these days?

    – Russ

  2. 2 Babak

    Russ, the Coppock guide is deeply negative but hasn’t yet turned up. I’ll keep a lazy eye on it and write if there is new news.

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