It's not too much of an exaggeration to suggest that central bankers have become the new gods of the financial world.
When they speak, markets listen. With a gesture, they can create money out of nothing, and turn the economic order on its head. They move in mysterious ways (as you'll rapidly realise if you ask a roomful of economists to explain precisely how quantitative easing works).
Trouble is, just like any other set of gods, they don't always give investors what they want. And that's why markets got a bit of a nasty shock yesterday.
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Because what European Central Bank boss Mario Draghi gave with one hand, Fed chief Bernanke took away with the other
Bernanke didn't say much but it was enough to derail markets
All eyes were on the European Central Bank (ECB) yesterday morning. And the ECB didn't disappoint. As expected, banks more than 500 of them clamoured for more funds. They got just over half a trillion in euros between them, a little bit more than the market had expected.
So no big surprises there. Risk was firmly on'. Then along came Bernanke.
The thing is, Bernanke didn't say a great deal. This wasn't an interest rate decision or anything significant. It was one of his regular testimonies' to Congress.
And he's not changed his mind on much. He was still pretty glum on the US economy. He said that the "fundamentals" behind consumer spending were weak, "access to credit" remained poor, and that inflation wasn't likely to be a problem, even with rising oil prices.
In other words, he hadn't suddenly turned bullish.
But clearly, it's what he didn't say that really mattered. He didn't turn around and say that he was about to unleash another batch of quantitative easing. And that put a dent in everyone's good humour. The dollar surged, and gold in particular, nose-dived.
We've seen all this before
So what happens now? Well, it's worth remembering that we've seen this already. This is how a deleveraging cycle works. And when I say we've seen it already, I'm talking about within the last couple of years in fact, we've seen it more than once.
What happens is, the economy looks as though it's about to implode. Obviously this happened in 2008/09. But it also recurred in mid-2010 with the US, and last year with Europe.
Safe' bond yields plunge (on dodgy debt, they soar). Stocks slide. Commodity prices fall. With no regard to the fact that falling commodity prices would be good for the real' economy, central banks pressed on by panicky pundits and politicians, and scared of contagion' print a load of money.
Bond yields stop plunging. Stocks ramp up again. Commodity prices pick up oil in particular. Things look like they're getting better. That's when the voices of those who are against money printing start to be heard more loudly.
Once again despite years of evidence to the contrary investors start to doubt whether central banks will continue to print. As a result, the rally runs out of steam, everyone starts to fret about deflation again, panic strikes and central banks feel forced to print again.
The fact is, until there's a genuine recovery, central bankers' fingers won't be far away from the print' button. But once there is a genuine recovery, what then?
Central bankers will be too slow to tighten
If there is a genuine recovery, central bankers will be too wary of derailing it to tighten monetary policy fast enough. As strategists at Lombard Odier recently pointed out, the danger is that we'll then see rampant inflation as a result.
That's one reason why I'm happy to hang on to gold. As we've already noted on a number of occasions, you don't want it to be the only thing in your portfolio, but it's worth having as an insurance policy.
But for now at least, there are several good reasons to hang on to the dollar too. With Europe, Britain and Japan all printing, and the US showing signs of hanging back, the US currency is all the more likely to keep rising.
But there's another way to profit from a strong dollar that doesn't involve buying US stocks. A strong dollar will also be good news for long-term MoneyWeek favourite, Japan.
Why? Because that'll mean a weaker yen, which is one of the two main things that has been holding Japan's recovery back. Already, the yen has weakened by about 6% against the dollar this month, and Japanese stocks are already benefiting.
Japan's other major handicap looks like it could be set to vanish as well. James Ferguson explains what it is, and lays out the bull case in detail in this week's cover story if you're not already a subscriber, you can subscribe to MoneyWeek magazine. It's a cracking read I really do recommend you get hold of this one.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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