Neither economical nor stimulating

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Ben D. Kritz

Ben D. Kritz

AFTER being severely punished for several weeks, global markets rebounded on Friday and Monday. But by Tuesday they were in a slide again, apparently setting up for the second dead cat bounce this month.

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For those who have little idea what that macabre term means, a “dead cat bounce” is a short-lived recovery in an otherwise falling market, which soon returns to a decline; even a dead cat will bounce if you drop it from high enough, so the saying goes.

Technically, the gain becomes the “dead cat bounce” when the index (or price, if the subject is an individual stock) drops below the previous low. The first dead cat bounce in our own PSEi was on January 13; if the index drops below its low of 6,084.28 on January 21, Monday’s gain will become the second. Most of the other regional markets are on a similar trajectory.

There are two obvious reasons for the gain at the beginning of the week. The first was perfectly normal bargain-hunting; falling share prices will always attract buyers sooner or later. The second reason was the hint that more monetary stimulus may be implemented soon, specifically from the European Central Bank and possibly from Japan.

Economic stimulus, in the vocabulary we’ve become accustomed to using in the past few years, means using one or more methods to put more money in the economy in an effort to increase consumer and business spending. The direct method is for the central bank to simply transfer cash to the financial system. China did this on Tuesday, dumping $67 billion into money markets ahead of the Lunar New Year holiday; the ‘quantitative easing’ program that was carried out for an extended period of time in the US was a similar exercise.

Even though the Tuesday stimulus was the largest the People’s Bank of China has carried out since 2013, it made no impression whatsoever on the markets; Shanghai dropped by about 6.4 percent on Tuesday. For one thing, the move by the PBOC was expected, because the rapid short-term increase in spending before the New Year holiday is a regular seasonal occurrence; if the central bank hadn’t added the funds, the entire financial system would quickly experience a liquidity crisis. And even though it was a large amount, the stimulus move by the PBOC, as far as anyone knows now, was a one-off; the central bank may make other moves in the near future, but there has not been any hint of that, whereas there has been from Europe and Japan.

The $67 billion incentive is not nearly enough to stop or reverse the slowing of the Chinese economy, or even make much of a dent in market losses racked up since the beginning of the year, and investors know it, which is why it was basically ignored. If the Chinese stimulus had any positive effect at all, it simply was to keep the markets from tanking to the tune of 8 or 9 percent on Tuesday, instead of just 6 percent.

The other method of stimulating the economy is through adjustments to monetary policy: Reducing key interest rates (overnight borrowing and lending rates), lowering the reserve ratio (the percentage of their funds that banks must hold to ensure solvency), or a combination of both. The Bank of New Zealand and the Bank of Canada are expected to go this route in the near future; the US Federal Reserve might, but probably won’t, in its meeting. Likewise, the Bank of Japan may or may not do the same this week; it seemed certain to up until a couple days ago, but some key financial officials have started to express misgivings (The BOJ meeting ends tomorrow, Friday). The stimulus from the European Central Bank, if it comes as expected sometime in March, will probably be a combination of policy adjustment and direct money market intervention.

The reaction, or lack thereof, of the markets on Tuesday to the PBOC move is probably a preview of what will happen as a result of these stimulus moves: Another dead cat bounce, maybe even a fairly impressive one, but nothing more than temporarily relief. The reason they won’t really work is not grounded in theory, and that’s why central bankers around the world continue to be confounded by what they are grappling with, and just keep tossing the same ideas at it in the vain hope something will stick. Theoretically, more money in the financial system—either as a result of direct intervention, such as bond repurchase programs, or as a result of lower interest rates that encourage borrowing—means more spending, which is obviously the positive everyone is looking for; if the stimulus is done at the appropriate scale, the increase in inflation it causes should be more than offset by the increase in spending.

The problem for at least the last five years, however, is that reality defies the theory—which in all science (except economics, apparently) means the theory is wrong, and those who have been trying to make it work should just give it up already. Stimulus moves have hardly made a dent in the general trend of the world economy, especially since the beginning of the oil price rout. Outside intervention has been proven powerless to move market demand; one glaring indicator of this is the persistence of low inflation. Oil prices are another; after all “oversupply” is just another way of saying “under-demand.”

Markets are still behaving in the closed-system fashion I described in my previous column on Tuesday, but there are signs the outside world is beginning to seep in; investors seem to be waking up to the reality that economic stimulus, in spite of every reasonable expectation, has turned out to be neither economical nor especially stimulating, and that it is going to take a much stronger force, one well beyond the capabilities of the central banking system, to move the monolith of demand.

ben.kritz@manilatimes.net.

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