How Central Bank Zombies Control the Stock Market

Zombies…zombies everywhere!

Popular culture is infested with the un-dead.

No less than sixty-five zombie movies hit the silver screen in the last twelve months. Some, like World War Z are worth watching, while you can probably miss Dating a Zombie.

The infestation has spread to TV shows too, with series like The Walking Dead.

No longer are you safe on the streets either. ‘Zombie walks’ – where tens of thousands of people stumble through the streets as zombies – have erupted globally including Australian cities.

What is it with this recent obsession with zombies?

On the way home from watching World War Z at the cinema with the missus, the answer struck me.

…We can blame Ben Bernanke, and let me explain why…

In a world where apathy reigns, the zombie walk resonates as a mild mannered protest.

Take a look at this photo from the recent Brisbane zombie walk:

It’s the same demographic each time: Generation Y, the teenagers through to the ‘thirty-somethings’.

Sure, they’re out to have some fun. But why do it all, and why specifically zombies…why aren’t they dressing up as the other current horror genre: vampires for example?

Is it a coincidence that zombies are a social metaphor for a rudderless, corrupted, join-or-die culture, mindlessly consuming as it spreads?

And is it by chance that Gen Y is has found expression in the zombie metaphor over the last few years in particular, as financial turmoil has spread to economic and social turmoil?

If this is getting a bit heavy, think about it. We are all Bernanke’s zombies in the markets too.

Almost half a decade of quantitative easing has long since transformed the investing community from fresh-faced free-marketeers into the half-alive-half-dead, stumbling around for fresh QE to feed on – all the time festering and slowly rotting a bit more.

The drip feed of US Federal Reserve QE has kept the market twitching for years. But is it all about to dry up?

Bernanke is hinting so. But I don’t want to add more zombie column-inches to the pointless discussion of ‘will he or won’t he’. The messages out of separate Fed members make it clear that they couldn’t agree on the colour of an orange between them.

Let’s look further up the food-chain instead to get word from zombie central command (AKA: The Bank of International Settlements – or BIS). BIS is ‘the central bank’s bank’ and their message is clear – no more QE please:

Central banks cannot do more without compounding the risks they have already created…How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back … how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions.

Tough words indeed from the Zombie Central Command…

60 countries’ central banks are members of BIS.

These include the Federal Reserve, the Bank of Japan, the Peoples Bank of China, as well as the European Central Bank.

BIS has clearly aimed this not just at the Federal Reserve, which has talked about dialling back the QE, but also Japan which is in the early stages of an epic QE program planned to go for another eighteen months.

But let’s not worry about Japan for today. That’s a whole separate barrel of worms.

Front and centre for market zombies today is if the BIS is pressuring the Fed to dial back on the QE sooner rather than later.

Markets Are Crashing Everywhere On the Prospect

And it doesn’t matter what it is.

…Bonds are falling.

…Currencies are falling.

…Commodities are falling.

…Stocks are falling.

Markets in Free Fall – Across All Asset Classes



Source: stockcharts

The zombies are in full-blown panic as their life support threatens to dry up.

But it’s not just the fear of the Federal Reserve liquidity drying up.

There has been a big China scare in the last week regarding interbank lending. The rate at which banks lend to each overnight other spiked to 14%, when 1-3% is more normal.

But instead of hosing the problem down with liquidity as is the usual response, the Peoples Bank of China (PBoC) has held back, with reports of a small level of support for one bank.

What stands out is that the PBoC has put the blame on the banks, telling them to do a better job of managing liquidity, and not to expect the cavalry to come riding over the hills to the rescue every time they stuff up.

The official response read:

At present, the overall liquidity in China’s banking system is at a reasonable level, but due to many changing factors in the financial markets and also because of the mid-year point, the requirements for commercial banks in liquidity management have become higher … commercial banks need to closely follow the liquidity conditions and boost their ability to analyze and make predictions on the factors that influence liquidity.’

It’s a dangerous game to play. Once a credit bubble pops, you don’t have much, if any, opportunity to stop it. So PBoC needs good reason to respond this way.

Maybe the words from Zombie command (BIS) hit home. After all, China has been one of the biggest credit junkies in recent years.

My colleague Greg Canavan at Sound Money Sound Investments has closely followed this story for a few years, and recently put out a chilling video of how this could pan out. It’s worth a watch.

The markets have very quickly flipped from complacent to fearful in the last few weeks. Until we get a better idea of what to expect from the Fed, and from China’s central bank…watch out for attacking zombies.

Dr Alex Cowie
Editor, Diggers & Drillers

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