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Some have called it the Age of the
Central Bank. Record monetary stimulus interventions in recent years have
propelled the stock market to levels not seen since the 2008 credit crash. By
whatever name you call it, central bank intervention has altered the
investment and economic landscapes.
The most common worries surrounding this
new interventionism are centered on the inflation outlook. Investors worry
that all the excessive liquidity created in the last four years will result
in higher commodity and consumer prices. Indeed, the monetary liquidity has
found its way into food and fuel price increases, which comprise a
substantial part of middle class budgets. By increasing inflation
expectations by keeping interest rates at near zero, the Federal Reserve has
even forced savers to spend more money and purchase goods in anticipation of
even higher prices.
Another impact of the Fed’s
ultra-loose money policy is buoyant equity prices. One could assert that this
is the main objective of the bank’s quantitative easing (QE) program.
By increasing stock prices the Fed is bolstering corporate balance sheets in
the face of dwindling demand for exports. The corporate economy has arguably
become the Fed’s number one priority in the final portion of the
deflationary Kress cycle.
One of the best ways of measuring the
immediate health of the retail end of the corporate economy is the New
Economy Index (NEI). The NEI averages the stock price performance of five key
components of the consumer/small business/e-commerce economy: Amazon.com
(AMZN), Ebay (EBAY), FedEx (FDX), Walmart (WMT) and Monster Worldwide (MWW).
These five companies collectively represent the sales, employment and transport
economy in the U.S. When smoothed out with a 12-week and 20-week moving
average to provide “buy” and “sell” signals, NEI
provides a real time economic indicator with superior timing to any of the
available economic indicators provided by the U.S. government. NEI has
captured every notable turning point in the U.S. economy on an
intermediate-term basis since 2007.
To the surprise of many economists, NEI
is currently at an all-time high and hasn’t confirmed an economic
“sell” signal since early 2010. Although we are late in the
long-term Kress cycle “winter” season, the signal being flashed
by NEI is commensurate with the economic performance of the early 1890s prior
to the Panic of 1893 (which answers to the year 2013 in the 120-year cycle).
The Fed will almost certainly do everything in its power to keep NEI elevated
through 2013 in spite of the strong and increasing deflationary undercurrents
from the 120-year cycle. The odds are against the Fed ultimately succeeding.
This leads us to the next commonly asked
question, “Has Fed and other central
bank action defeated the Kress 120-year Cycle? Can the cycle come down with
all the central bank stimulus of recent years?”
If the world's major
central banks coordinated a massive stimulus response to the Kress
deflationary cycle they could possibly succeed in mitigating the deflationary
impact of the cycle. The problem is that while the BOJ, Fed and China's bank
are pumping money, the governments of the major countries, including the
U.S., are embracing deflationary policies like austerity and deficit
reduction. There is no coherent response to the Kress cycle as yet.
The other
point to consider is that even if the world's central banks successfully
staved off the 120-year cycle, once that cycle bottoms in late 2014 there
will be a tremendous lifting of deflationary pressure. In other words, a new
inflationary long-term cycle begins. What happens when all the excessive
liquidity these banks have created is suddenly put to work after 2014?
Massive inflation would be the most likely result. The central banks may end
up getting more than they bargained for in their fight against deflation.
2014: America’s Date With Destiny
Take a journey into the future with me
as we discover what the future may unfold in the fateful period leading up to
– and following – the 120-year cycle bottom in late 2014.
Picking up where I left off in my
previous work, The Stock Market Cycles, I expand on the Kress cycle
narrative and explain how the 120-year Mega cycle influences the market, the
economy and other aspects of American life and culture. My latest book, 2014:
America’s Date With Destiny, examines the most vital issues facing
America and the global economy in the 2-3 years ahead.
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