The conventional wisdom seems to think the U.S. Federal Reserve is to the bourses of Europe and Asia what Botox injections are to movie stars. Take away the "shots" of accommodative monetary policy by the Fed -- and the main stock averages start to slump and sag. Deliver it in regularly scheduled doses -- and shares remain perky and upright.
Nothing reinforces this belief like the spate of recent news stories regarding Germany’s DAX Index and the U.S. central bank’s effort to stabilize the dysfunctional credit market. Off the top are these memorable items:
- Following the March 10, $200 billion Fed infusion, one Frankfurt-based trader gripes: “Nonetheless, what investors really want to see is for interest rates to be reduced. All of this other stuff is really just fluff.” (CNN Money)
- Following the March 10 rumors of an emergency rate cut: “German shares higher as investors looked to increasing indications that the U.S. Fed might be preparing for a further rate cut.” (AP)
- Following the March 11 ZEW Center For European Economic Research report revealing an increase in Germany’s investor confidence: “The ZEW Index is forward looking and there’s hope that the US fiscal package and interest rate cuts will help revive the U.S. economy.” (Bloomberg)
There’s just one problem: the notion that rate cuts will rejuvenate stocks is as false as silicon implants. On this, the year 2000 provides a powerful reminder of the Fed’s inability to keep the economy out of harm’s way.
2000: Growth in the world’s third largest economy, Germany, is following in the gangbuster footsteps of the U.S. Here, a January 1, 2000 New York Times observes: “As we prepare for the 21st Century, a united Germany is the economic engine that will drive all of the European Union and is recognized by its peers as Europe’s future world power.”
Soon after, boom turns to bust. The soaring global marketplace sputters, runs out of steam, and drops precipitously out of the sky. In response, the U.S. Federal Reserve initiates a relentless, rate-cutting campaign from 6.5% in 2000 to a half-century low of 1.25% in 2002.
All in vain: From 2000-2002, the “four horsemen of the apocalypse” (AP) rode into Germany’s economy: record-high unemployment, business contraction, recession, and the “worst stock market crash” since the Depression, including the complete shut-down of the region’s high-tech Neuer market and 50% plunge in the DAX index.
Ancient history? Not exactly, as more recent events make plain: the U.S. Fed has slashed interest rates FIVE times since September 2007 (from 5.25% to 3%), including the largest reduction in 23 years at an emergency inter-meeting cut on January 22. During this time, Germany’s DAX Index has dropped 20% -- the sharpest decline among major European markets.
Bottom line: Counting on the U.S. Fed to come to Frankfurt’s rescue is a lost cause. By the time the central bank steps in most aggressively, the market’s biggest trend changes have already taken place.
And, in the March 2008 Global Market Perspective, our analysts present a special, four-page section including groundbreaking measures of the DAX’s near, and long-term strength: such as, the Euro Schatz Yield and the 100-month Money Flow Index. In Global Market Perspective’s own words: “The persistent trend of the [Money Flow] index shows” whether the bear market is nearly over.
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