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Germany’s DAX: “What Happens When the ECB’s Money Pump Stops?”

Here’s what “imperils the entire financial system”

by Bob Stokes
Updated: May 13, 2021

There's a potential downside to the European Central Bank's repeated bond purchases and liquidity injections.

As our May Global Market Perspective says:

The ECB has transformed the comparatively small problem of a few overleveraged banks into a systemic issue that now imperils the entire financial system.

Also consider the ECB's balance sheet and the main stock index of the largest economy in Europe.

The May Global Market Perspective also showed this chart and said:

MoneyPump

This chart comparing the nominal DAX (top graph) with the DAX divided by the ECB's balance sheet (bottom graph) illustrates the truly historic nature of the liquidity injections. After trading more or less in unison throughout the 2000s, the graphs decoupled in 2015, as the ECB switched on its money pump to combat Europe's sovereign debt crises. Since then, the nominal DAX has nearly doubled, while the DAX in terms of ECB assets fell to a lower low in 2021.

If you're familiar with the basic tenets of socionomics, a new science of social prediction, you know that social mood drives social actions. In other words, mood changes first -- and then events like bull or bear markets in stocks and other consequences follow.

Well, today, social mood is so optimistic that we have this April 20 headline from Bloomberg:

Central Banks to Pour Money Into Economy Despite Sharp Rebound

This includes the ECB, the U.S. Federal Reserve, Bank of Japan and 13 other institutions.

However, history shows that social mood is not stagnant. It swings from extreme optimism to extreme pessimism and back again -- repeatedly. And as mentioned earlier, it changes the trend on its own, no "catalyst" needed.

When the current optimistic mood reverses and begins to trend toward pessimism, expect the public to demand that the ECB (and other central banks) turn off the spigot.

Social mood is also reflected as Elliott waves on the price charts of a nation's main stock indexes. Rising prices indicate a positive mood and vice-versa. (The stock market tends to be the best barometer of a nation's mood because investors express their bullishness or bearishness more or less instantly via their buying and selling decisions.)

So, a shift toward pessimism will coincide with a decline for the DAX, as well as other equity markets around the globe.

Get our Elliott wave analysis inside or current Global Market Perspective so you can prepare for what may be just around the corner.

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