Every major central bank is making money easier to borrow
There’s a very old rule in the stock market: “Don’t fight the Fed”. It works in both directions—if the Fed is making money more plentiful and cheaper to borrow, stock prices have a tail wind. The opposite is true when the Fed is making money tighter—stock prices will struggle, or worse.
For the first time since 2009 every major central bank is easing credit.
- The US Federal Reserve is on hold at 0% until 2013.
- The ECB (European Central Bank) has provided unlimited cash to banks for the next three years.
- The BOJ (Bank of Japan) has maintained near zero rates for 10 years.
- The PBOC (Peoples Bank of China) began easing credit late in 2011.
This could create inflationary issues down the road, but for now the world’s central banks are in a synchronized cycle of credit easing driven by the crisis in Europe. We are all threatened by a massive deflationary event in Europe so taking a risk today on future inflation seems reasonable.
Going back to the old rule: with easy money everywhere asset prices should increase over the next few months. That includes stock prices and it largely explains the rally since early October.
January was a spectacular month so we probably should expect some weakness in February. But any pull-backs will be buying opportunities, at least for the next few months.
We need to take advantage of this rally (and so far we have) because the opportunity to profit will not be permanent. Europe remains an enormous risk and it is inevitable that some kind of banking/credit crisis will hit that area before long. We need to be ready when that happens.
But for now, the path of least resistance is up.
Daniel A. Ogden