- Money Morning Australia

Central Bank Prints More Money — No One Cares

Written on 13 December 2012 by Kris Sayce


This morning the Financial Times reports:

‘The Fed also beefed up its third round of quantitative easing to $85bn a month – adding $45bn of Treasury purchases to its commitment to buy $40bn of mortgage-backed securities each month – and said it will keep buying until there is a substantial improvements in the labour market.’

There was a time when an announcement about central bank money-printing would have sent the market cock-a-hoop.

Stocks would have taken off.

But the market met this latest round of money-printing by the US Federal Reserve with little more than a pfffffffftttttt. The S&P 500 gained a total of 0.04%.

It’s good to see the market has finally caught up with our view on this. News of Fed money-printing has bored your editor rigid for the past two years.

We’re more inclined to think that the best way to defeat the central bankers is to employ the ‘bad child’ strategy – just ignore them.

Because one thing now appears clear: the days of making money from central bank money-printing are over. It’s back to old-school investing…

Face it, even Goldman Sachs hasn’t made the same megabucks that it did a few years ago.

In 2009, Goldman Sachs made $13.4 billion profit. In 2010 it made $8.4 billion profit. In 2011 it made $4.4 billion profit…

And for the first nine months of this year, world governments’ favourite bankers have racked up USD$4.6 billion in profits (USD$5.6 billion if you include the last three months of last year).

So, why did investors give this round of Fed money-printing the cold shoulder? We asked our resident Fed-watcher and technical trading guru, Murray Dawes, to explain:

‘The $45 billion of Treasury purchases announced last night just replaces the buying that occurred with Operation Twist. In Operation Twist they sold short-term bonds and bought long term Treasury bonds. But they have run out of short-term bonds to sell, so now they are going to buy $45 billion of Treasuries outright. If they didn’t do that and Operation Twist ended, then their buying at the long end of the yield curve would have more than halved.’

The fact is the world has been turned on its head for the past four years. People and investors have forgotten the real driver of prosperity and wealth.

It’s not central bankers or governments that create wealth, it’s entrepreneurs, business people, and individuals…each acting in their own selfish interest.

That’s best shown in an article in the UK Daily Telegraph discussing Google’s tax avoidance methods:

‘”It’s called capitalism,” he [Google chairman, Eric Schmidt] said. “We are proudly capitalistic. I’m not confused about this.”

‘In Britain Vince Cable was unimpressed by Mr Schmidt’s views. The Business Secretary told The Daily Telegraph: “It may well be [capitalism] but it’s certainly not the job of governments to accommodate it.”‘

We’ll agree that avoiding taxes is capitalistic. But we’ll take issue with Mr Schmidt’s claim that he and Google are ‘proudly capitalistic’. After all, as the Daily Mail reported, Google donated USD$1.9 million to Barack Obama’s re-election fund.

Donating money to the State isn’t capitalistic…it’s fascistic at best.

The Economy’s Engine Room Starts to Fire-Up

But Mr Cable’s comment on the role of government is key. Governments aren’t interested in entrepreneurialism, wealth or prosperity. They just want to take money from one group of folks and give it to another.

That’s why investors have to stop begging central banks and governments to ‘do something’ about the economy.

What really needs to happen is for the meddlers to leave the economy alone. They need to let entrepreneurs do what they do best – create ideas and wealth.

But right now, with central bank meddling, the big banks have received a free-kick, while the entrepreneurial engines of the economy (small companies) have gotten kicked in the teeth.

You can see this on the chart below of the banking sector (blue line) and the Emerging Companies Index (pink line):

Source: CMC Markets Stockbroking

Small companies can’t get access to funding because investors are too cautious about the direction of the economy. OK, that’s not strictly true. They can get funding by issuing new shares, but at a big discount to the current market price.

Most investors would rather keep their money safe than punt on a risky stock.

Trouble is that becomes self-fulfilling. The more the meddlers meddle, the more uncertain investors become, and the less likely they are to take risks. That’s until it reaches a stage where no one cares what the central bankers do.

In our view the market has hit that point now…

Why 2013 Could be a Great Year for Small-Cap Stocks

That should be good news (finally) for smaller companies. If investors start believing the easy money is over, it means they’ll look at risky stocks again.

There are a lot of good little companies trying out some pretty incredible things. For instance, over the past few months we’ve come across a bunch of companies in the IT and internet sector that stand to make big strides in the coming years as the National Broadband Network (NBN) nears completion.

But these companies were doing great things even before the NBN. The point is business people come up with new ideas all the time. They just need the opportunity to express those ideas.

We thought that time wouldn’t come until the meddlers stopped meddling. But perhaps we got that wrong. All it needed was for investors to become desensitised to the meddling.

As last night’s performance of the S&P 500 shows, that’s happening now. We can’t guarantee it, but after more than a year of terrible small-cap stock market returns, we’re prepared to bet that 2013 could be a great year for those investors who are prepared to take a risk.


From the Port Phillip Publishing Library

Special Report: The Fuse is Lit

Daily Reckoning:
The Australian Dollar Flys Higher While Investors Look to Get High

Money Morning:
The Price of Risk in the Stock Market

Pursuit of Happiness:
The One Industry Where the State and Government Excels

Australian Small-Cap Investigator:
Why Invest In Small-Cap Stocks? And Why Now?

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Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

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