Much bated breath over the latest announcements from the tool-bare European Central Bank this morning. The ‘Great Draghi’ revealed that they will try yet another iteration of cutting practically nil rates to even more nil and buying up even more questionable loans off banks in the hopes that banks will then make more questionable loans to who knows who.
Running past the end of all reason we are now living through the third asset bubble in just the past 18 years, and the largest leverage bubble ever in human history. In the late 1990’s we witnessed the mania of the internet, followed by the mania of housing and consumer credit and today we have the mania of central bank worship or what Kevin Flynn dubs today, “The Era of Invincible Stimulus”. This should cause us all to revisit the timeless lessons of history and Bob Farrell’s simple truth: “There are no new eras – excesses are never permanent.”
See: The Fallacy of Central Bank Stimulus for an excellent summary of why this most recent central bank bubble is doomed to end at least as badly as its many predecessors:
“Central bank stimulus is not an invisible force field against adversity. It may have crept into the popular imagination that way of late, the way investment mantras do, but there is no historical evidence to support it. In the meantime, consider that U.S. domestic valuations are very dangerously high, that the margin for error is dangerously thin, and that investor bearishness is at multi-decade lows. If nothing at all goes wrong, then stocks will continue to rise. But something always does, as Farrell’s rule #3 observes. That would bring rule #1 into play: Markets tend to return to the mean.”