Don’t Blame October, Blame the Banks

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In just one month, eight months of gains evaporated.

Not only did our market fall, US investors, European investors, tech investors and commodity traders all felt the ‘October Effect’.

To some, the October Effect is a real phenomenon. The believers are convinced October is a terrible month for stocks.

The panic of 1907 happened in October. So too did Black Tuesday and Black Thursday of 1929. Black Monday of 1987 was also in October.

The declines this year just add another data point to the theory.

If you can’t tell, I’m not one of the believers. If October is such a terrible month for stocks, why doesn’t the market fall every October?

The Bombay Stock Exchange (BSE) for example, sees October as any other month. Since 2000 to 2015, gains in October are a little under 1%.

MoneyMorning 05-11-18

Source: Stable Investor
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No, it’s not October you should blame for our recent decline. You should blame those who allowed asset prices to get so high in the first place.

Blame the banks.

Why should you blame the banks

You might remember the famous line from Paul Keating ‘the recession we had to have’.

Keating said this in November of 1990. Punters had just seen stocks globally fall by 25%. Aussie stocks fell 40%.

Government debt was rising. Inflation was kicking up.

So why was this a recession we had to have?

Because banks created far too much money!

Aussies drew the short straw. They were the ones who had to shoulder central banker’s irresponsible decisions. In fact, Keating later blamed the Reserve Bank of Australia (RBA) for the millions of jobs and wealth lost by Aussies.

The RBA was far too slow to adjust interest rates to stop rampant inflation.

During the 1980s, Aussies saw the inflation rate double. This was because billions of newly created money was vying for a fixed number of goods and services.

Anyone holding cash saw their wealth evaporate.

It was only in 1990 that the RBA decided to act. They increased the cash rate to 17.5%.

Of course, it was a little too late.

In the years that followed, unemployment rocketed. The unemployment rate was sitting below 6% in the late 1980s. Heading into the 90s it rose above 10%.

To prevent the economy from falling further, the RBA had to reverse its policy immediately. The cash rate quickly fell all the way back down to 4.5% by 1993.

Banks like the State Bank of Victoria and the State Bank of South Australia failed. Labor gave the latter $970 million so it could stay on its feet.

I don’t think we’re heading into a similar recession any time soon. But we still have the same problem: central bankers willing to roll the dice with interest rates, which ruins wealth in the process.

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There are still more declines to come

How do you think stocks climbed so high from their 2009 lows? Why do you think we’ve seen such a long bull market in stocks and real estate up until this point?

Central bankers have flooded the system with new money. A lot of it goes towards unproductive activities, like transferring land ownership, or speculative bets on stock positions.

That’s why I still think there are more declines to come.

Interest rates are still incredibly low.

And according to The Wall Street Journal, the US Federal Reserve continues to toy with the market…

The Federal Reserve announced one of the most significant rollbacks of bank rules since President Trump took office with a proposal for looser capital and liquidity requirements for large U.S. lenders.

The changes would affect large U.S. lenders including U.S. Bancorp , Capital One Financial Corp. , and more than a dozen others. The largest U.S. banks, including JPMorgan Chase & Co., wouldn’t see any significant rule changes, and some in the industry thought the proposal didn’t go far enough.

The draft proposal, approved by a 3-1 vote at a Wednesday meeting of the Fed’s governing board, would divide big banks into four categories based on their size and other risk factors. Regional lenders would be either entirely released from certain capital and liquidity requirements, or see those requirements reduced. They could also, in some cases, be subject to less frequent stress tests.

Basically this means the Fed is giving banks the green light to create more money, even as they lift interest rates. It will potentially stave off asset declines in the interim.

What you’ve seen so far is not a liquidity crisis or a rotation from stocks to bonds. We’re still waiting for these.

What you’ve seen is just nerves. Investors are getting nervous about what might happen. And what could happen next might be a whole lot worse than we’ve seen.

Keep your eyes peeled. The best opportunities are on their way.

Are you prepared?

Harje Ronngard,
Editor, Money Morning

PS: Population growth is booming — find out how you can make the most of a massive global infrastructure rush in this free report. Get access now.

About Money Morning Editorial

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the…

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