The Next Round of the Great Crisis Has Begun

The entire rally in stocks post-2009 has been due to Central Bank intervention of one kind or another. Whether it be by cutting interest rates, printing money, buying bonds, or promising to do more/ verbal intervention, the Fed and others have done everything they can to push stocks higher.

As a result, today, more than 90% of market price action is based on investors’ perceptions of what the Central Banks will do… NOT fundamentals. For instance, if bad economic data hits the tape, the market tends to rally because investors believe this will result in the Fed having to print more money.

Again, the primary driver of stocks is no longer fundamentals, but Central Bank intervention.

As a direct result of this, the final and ultimate round of the Crisis that begin in 2008 will occur when faith is lost in the Central Banks.

That round is now beginning, with the Swiss National Bank breaking its promise to maintain the 1.2 Franc/Euro peg. This is the proverbial emperor has no clothes moment: the time in which the investing public realizes that Central banks are not omnipotent.

There have been hints of this for years now.

Firstly there was the ongoing “is it legal or is it not legal?” arguments for the ECB’s OMT program. Mario Draghi “saved” the financial system and the EU in 2012 by promising to do “whatever it takes.” Two years later, it’s still not even clear that he could do “what it takes” from a legal standpoint.

Then came Bank of Japan Governor Haruhiko Kuroda’s decision to increase the Bank of Japan’s QE program, not because it would benefit Japan’s economy, but because doing so would make his colleagues’ forecasts better match his own.

All of the above indicated that Central Bankers were just making it all up on the fly… but it wasn’t until the Swiss National Bank broke an outright promise, broke a set currency peg, AND lost between $60-$100 billion in a single day, that things really got ugly.

At this point, the writing is on the wall: nothing can be taken for granted.  No assurances or promises or proclamations will hold.

The next time stuff hits the fan, will the world be as trusting in Central Banker proclamations? Will we continue to believe these folks are omnipotent? Or will their phony promises accomplish nothing?

We’ll find out.