Central Banks Still Creating Mayhem

02/24/2014 12:01 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Now that the Fed's tapering process has begun, MoneyShow's Jim Jubak wants to remind investors of how the other central banks can still move the markets.

Okay, if you thought that, well, with the Fed deciding to taper, that we were done with central banks, you were wrong. In the beginning of 2014, actually in February of 2014, it's clear that we still have central banks determining the action, only right now, it's not the Fed, it's the Peoples Bank of China and the Bank of Japan.

We had that on back-to-back days on February 17 and February 18. On the 17th, we had bad news out of Japan that GDP growth in the fourth quarter was only about 1% annualized when people were expecting more like 2.5%, 2.8%, sometimes 3%, so that was bad news. It looked like maybe the Japanese economic rally was going to stall, but markets went up, because you had really, really positive money supply news out of China, that new bank loans, new bank lending rose about threefold in January from the December level. That meant more money going into the economy, looser credit, higher economic growth. The next day, we had, sort of, a reversal of that. The Bank of Japan responding to the, sort of, disappointing GDP growth the day before they said that, “Hey, you know, we had this program of unlimited low-cost loans to banks that was supposed to expire in March somewhat limited, but you know what, we're going to extend it another year until March, 2015, and we're also going to loosen the terms a bit so that banks can borrow more money for a longer period of time.”

In other words, the Bank of Japan said 1% growth is not good enough. We're going to stimulate the economy by flooding it with more money, so that was a huge, huge up day for the Tokyo market, so we had about a 3.1%, 3.2% advance in the Nikkei 225 Index (NKY:IND). On the other hand, back in China, the People's Bank looked at their numbers and said, “Oh, you know, money supply's growing too fast, we've got too much bank lending,” and they decided to drain a little bit of money, about $7.9 billion worth of Yuan out of the Chinese banking system, by raising the rates on the 14-day repurchase, so that reduces the amount of money, raises the cost to banks for borrowing in that market, and that, indeed, is a way to restrain money supply growth.

So, the net, on both of these, is that on the day that the Chinese story about bank lending being up came through, everybody rose. The next day, when the Chinese story disappointed, but the Bank of Japan moved strongly, everybody rose too, so, right now, we're still in, kind of—central banks are pumping more money into the global economy just like they used to, only now, the name of the bank has changed and it's not the Fed, it's the Bank of Japan and the Bank of China, which is pursuing a kind of slightly-negative, but mostly neutral monetary policy.

And that's the way 2014 has begun and the central bank story continues.

This is Jim Jubak for the MoneyShow.com Video Network.

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