Wednesday, April 01, 2009

G20 Summit: Are Great Expectations Justified?

G20 London Summit 2009
On April 2 in London, the leaders of the Group of 20 industrial nations will meet to decide what to do about the financial crisis. This summer the crisis will be two years old; the G20 believes something finally must be done to end it once and for all.

The world’s financial bureaucrats remain convinced they are in control of the situation. Never mind the fact that as they lowered interest rates and “injected liquidity” over and over in the past eighteen months, stocks kept falling, credit markets remained frozen and global economies stalled as deflation spread.

The excerpt you are about to read explains just who is really in control and why the government's efforts have been failing. It is from the December 2007 Elliott Wave Theorist – but don’t let the date fool you. It’s a most relevant read, because it was published by EWI’s founder and President Bob Prechter right after the central bankers’ previous major rescue attempt.

As you are reading this, please also keep in mind that at the time, the DJIA was trading in the mid-13,000s, the economy was yet to crumble, and the public’s belief in the powers of central bankers was still unshaken.

Bob Prechter - Elliott Wave Theorist - December 2007

The world’s “big five” central banks – the Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank – have just made the announcement of their lives. Apparently working all night on Tuesday-Wednesday, the Fed arranged all these players’ cooperation in order to come up with a plan to bolster confidence among the world’s creditors and borrowers. The Wall Street Journal (12/13) calls it “the biggest coordinated show of international financial force since Sept. 11, 2001” [that] would provide billions of dollars worth of “liquidity” in the form of low-cost, one-month loans to qualified banks [in] a drive to create more inflation.

This is probably the single most important central-bank pronouncement yet. But it is not significant for the reasons people think. By far most people take such pronouncements at face value, presume that what the authorities promise will happen and reason from there. But the tremendous significance of this seismic engagement of the monetary jawbone is that if this announcement fails to restore confidence, central bankers’ credibility will evaporate.

At least that’s the way historians will play it. But of course, the true causality, as elucidated by socionomics, is that an evaporation of confidence will make the central bankers’ plans fail. The outcome is predicated on psychology. If wave c of the bear market has begun, nothing the Fed does will engender confidence. On the contrary, everything it does will be interpreted, in the trend toward negative social mood, as something bad. The Fed’s failures will not create fear; fear will create the Fed’s failures. You can’t tell the market what you will or won’t accept. It tells you. Good luck changing the mood of the crowd.

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In the stock market collapse of September-November, 1929, consortiums of banks announced several times that they were pooling resources to prop up stock prices. They failed. But today’s central banks are many multiples bigger than the biggest banks of 1929, and they have unlimited credit and no real-money standard. They are nothing less than super-banks, which can create credit from nothing; all a customer has to do is ask for it.

Ah, but that’s the problem. Someone has to ask. The expansion of credit depends on willing and able borrowers. Debtors have to trust the future well enough to borrow—and pay back with interest—the credit the central banks have to offer.

The root of today’s systemic dilemma is not mechanical, as the monetary engineers believe, but psychological. Bernanke thinks he can pull switches to prevent deflation. But you can’t pull switches on a crowd. It pulls switches on you. When the Fed’s credibility withers in the environment of a bear market, the monster will have overpowered his makers, and the gunfight will be over.

When the Dow slipped below 6,500 on March 6 of this year, “the gunfight” clearly ended in favor of the bearish market psychology that shredded ALL central banker efforts. So, does this mean that they shouldn’t even try? Should the G20 summit be called off?

Well, as the old saying goes, there is a time to throw stones and a time to gather them. Government interventions only work when they are aligned with the mood of the crowd. The previous rescue attempts got trumped by fear. But the recent rallies in global stocks show that investors’ collective mood is rebounding; fear is receding.

Because of that, the timing of the world leaders’ G20 summit could turn out to be quite good. Call it luck – because it’s exactly what it is. To find out how high this optimism may carry European stock markets, click here. If you are a U.S. investor, our Financial Forecast Service will get you up to speed. Read them risk-free now.

Good day, safe investing and trading.