Stocks have started the year on a downward track. Energy stocks are hurting due to continued low oil prices and bank stocks have joined in the race to the price bottom. Amidst the commentary we found an article in CNBC online quoting Deutsche Bank as saying that only the Fed can save stocks. Are we now going to blame the stock selloff on the Federal Reserve?
The prolonged sell-off in risk assets across the globe will only abate if the U.S. Federal Reserve changes its path and begins to loosen its monetary policy once again, according to strategists at Deutsche Bank.
Chinese growth fears, stress in the U.S. energy sector and fragile balance sheets in European financial companies have all been credited in the last week for fueling the sell-off. However, there’s only one real cure for this current bout of weakness, according to a team of European equity analysts at the German bank, led by Sebastian Raedler.
Raedler said that U.S. high-yield spreads – the difference between investment grade and non-investment grade bonds – have risen above their 2011 peak and warned of the potential for a self-fulfilling “full default cycle.” He highlighted the stress had started with energy firms – that have been hit by the oil price plunge – but added that it wasn’t confined to this sector.
Let’s remember that after a dramatic several months the Fed raised its interbank lending rate by a quarter of a percent and promised to hold off on other rate increases until the economy is stronger. Of course the Fed finished its quantitative easing program more than a year ago as noted in Bloomberg’s article, The Fed Eases Off.
It was the biggest emergency economic stimulus in history and now it’s over. The U.S. Federal Reserve’s once-in-a-lifetime program to buy immense piles of bonds, month after month, in an extraordinary effort to restart a recession-deadened economy came to an end in October 2014 after adding more than $3.5 trillion to the Fed’s balance sheet – an amount roughly equal to the size of the German economy. The bond-buying program, called quantitative easing or QE, had been controversial since its start in 2009, as had the Fed’s decision in 2013 to gradually reduce the monthly economic boost, a plan that became known as the taper.
As Deutsche Bank decides to blame the stock selloff on the Federal Reserve we have to wonder if they want have the Fed start printing money again or roll back a miniscule quarter percent interest rate hike? There are times when the market needs to take care of the market and this is probably one of them. We have written about how the economic situation in China resembles Japan in the late 1980’s. A economic miracle is revealed to be partly smoke and mirrors as too much industrial expansion fueled by bad loans acted like the man behind the curtain manipulating the Great OZ. The Chinese economy needs to adjust however painfully that happens and the world will feel some of the pain. Blaming the stock selloff and general economic malaise on the Fed is just short term distraction. In the meantime reread our article about how you can benefit from the coming Chinese economic collapse.