Markets Hooked on Easy Money

03/08/2012 11:15 am EST


Jim Jubak

Founder and Editor,

Two key news events provide clear evidence to MoneyShow’s Jim Jubak that the markets are hooked on easy money, and it raises questions about the dangers ahead.

If you’re worried that the financial markets are hooked on easy money, February 29 was a really bad news day, in two different parts.

First, the European Central Bank announced the results of the new three-year lending facility, and European banks signed up for €530 billion more in borrowing from the ECB. So now we’re looking at about €1 trillion over the December and February facilities.

What’s interesting is that the European markets didn’t go wild on a rally on this. They basically said, "Oh, €500 billion, that’s what we sort of expected."

It’s the level of expectation that is important to watch here. The failure of markets to react to something like a €500 billion stimulus leads me to say, "Oh, so that’s what’s propping up this market. Without this money, the market would have actually gone down."

Switch scenes now to point two. Coming out of the US, we had Fed Chairman Ben Bernanke testifying in front of Congress. What he said was that the economy is not expanding rapidly, but we are getting some job growth. We don’t see a need, he said, for the Fed to launch a third program of quantitative easing, where the Fed went out and bought Treasuries or mortgages and mortgage-backed securities, and put that money therefore into the money supply and into the economy.

What’s interesting is that when he said that, we had a huge reaction. The market was sort of expecting and hoping that the Fed would say that they’re going to put more money out there into the money supply. When they didn’t, the dollar went up and gold plunged. Gold went down about 4% on the day.

So again, you’re looking at evidence that the market is now expecting more stimulus. Even if you look at the Fed and go, these guys have really expanded their balance sheet, they’re blowing it out. The real issue in front of the Fed is how to get some of that money out of the economy.

Yet the market seems to expect every time they turn around that some central bank somewhere in the world is going to put more money into the financial system so that stocks and bonds will go up. It’s that level of expectation that I think worries some of us. It’s the fact that if you take this money out when a market is expecting a constant inflow of new money, you’re really looking for a fairly severe reaction from asset prices.

A 4% drop in gold on a day is in 2011 terms pretty much par for the course. Once upon a time, that might have been a big move, but we’ve gotten used to different levels of volatility.

Nonetheless, what we’re looking at is a market that’s giving us lots and lots of signs that it really is hooked on easy money.

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