Has the Fed left you spooked? What about the other central banks around the world? If you fear all of them, I understand – they set policies, and there’s nothing we can do about it. However, our fear is misplaced – but more on that later.
Fear of central banks have once again permeated our brains, pushing many investors and traders back into “risk on” mode. Last week, China cut rates and lowered reserve requirements, the sixth such move this year. China also removed the cap on bank lending, a further move to deregulate interest rate policy.
Meanwhile, Chairman Draghi hinted that more stimulus was coming down the line during a European Central Bank (ECB) meeting last week. This announcement started a massive rally on Thursday that continued into Friday. (If you’ve been in bearish mode, your portfolio has been torched by three weeks of massive gains and little-to-no give back. Some analysts are even calling for new, all-time highs before the end of the year.)
Why is the ECB talking about a stimulus? So money flows into the system, the key to increasing asset prices. The more liquidity available and the fewer investment alternatives, the more stock prices go up, creating an endless (and artificial) bull market rally (or that is the hope). Of course, that is not the way it should happen. In a perfect world, economies grow organically and cycle through booms and busts.
As much as we might not like it, China and Europe’s actions have been consistent since 2009. Monetary policy has been top-of-mind for central banks, which are very afraid to let their economies slip into a bust cycle and possibly fall into the abyss. This, of course, is absurd, and their policies will eventually hurt world economies in the long run. Because central banks do not look at a clock or calendar, they can string out accommodation for as long as they wish.
Is this fair to traders and investors? Wrong question.
How can you take advantage of the situation, seek high probability trades, and grow your account? This is the only question that matters.
If you spend your time fearing central banks, you are missing out on trades. If you’re angry about their policies and decide to fight the giant money hose, you will eventually pay the consequences. Aggressive monetary policy may be wrong, but it’s reality. Stock prices will continue to rise as long as it is standard operating procedure, so use it to your benefit, find great trades, and increase the size of your portfolio.
