This One Group of Bankers Can Help You Predict The Markets

bank1Douglas Davenport: If you’re like me, you’ve probably wondered why nothing seems to change in Washington, D.C., no matter who’s elected to Congress or the Oval Office.

There’s a little-known reason for that: It’s because politicians don’t really control public policy. They, like us, are beholden to the whims of a much more powerful cabal — global central bankers.

Fifty-eight of the world’s largest central banks are members of the Bank for International Settlements (BIS), a group that meets every two months behind closed doors in Basel, Switzerland, the politically neutral safe-haven nation that pioneered private banking.

The BIS’s membership includes some of the most influential people on the planet, including Federal Reserve Chairman Ben Bernanke, European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda. In fact, BIS members represent countries that produce $51 trillion in goods and services, nearly 80 percent of the world’s economic output.

At their bi-monthly dinner meetings, the central bankers supposedly discuss monetary policy, the global markets and international money flows. But we don’t really know, because the meetings are private — no transcripts, no minutes and no journalists allowed. Even staff members are barred from the room.

What is certain is that any major policy decisions made by any of the world’s large central banks are cleared through the BIS first. This means that when Bernanke and his Fed compatriots make a major policy move, or a statement about their intentions, they’re not just considering its impact on the U.S. economy. They’re thinking internationally. So it’s fair to wonder whether they’re putting concerns for the global economy above the national interest.

Any major policy decisions made by the world's large central banks are cleared through the BIS first
Any major policy decisions made by the world’s large central banks are cleared through the BIS first.

The group hasn’t exactly had a storied past. The Bank for International Settlements accepted Nazi gold during World War II, helping to fund Hitler’s expansion. In more recent times, the BIS helped to birth the euro, which is now faltering as the common currency union is under threat of falling apart.

The View From Basel

The vast power wielded by the Bank for International Settlements means that when it releases a statement, we’d be wise to sit up and take notice. And its latest warning is a doozy.

On June 2, the BIS told traders that the combined effects of quantitative easing and the yen carry-trade (which I explained last week), are creating unsustainable bubbles in the global stock markets. The statement said that “stock markets are ‘under the spell’ of the world’s central bankers, with cheap money driving stock prices to record highs despite a lack of good economic news. … Markets are under the spell of QE to the point that negative news such as poor jobs data in March does not stop stock prices from climbing higher.”

The BIS further warned that once the equity bubble begins to burst, and interest rates start to rise, the momentum will be difficult to arrest, and the fallout will cause major damage to the global economy.

The BIS’s advice to you and me? “Investors and financial institutions should get ready for an eventual normalization of interest rates. … That will cause losses for bond holders, for the losses, when they do occur, will be spread across banks, households and industrial firms.”

The Markets React

Investors, understandably, took the statement and subsequent signals from Bernanke and other Federal Open Market Committee members as indications that the Fed will soon begin tapering its program of monthly bond and mortgage-backed securities purchases. As a result, the bull market in U.S. stocks has begun to stumble, and volatility has crept back into the marketplace.

Meanwhile, U.S. Treasury yields, which had remained near historic lows for months, jumped to their highest levels in more than a year.

But the tremors are being felt far outside the U.S. Within the past two weeks, Japan’s benchmark Nikkei Index has fallen more than 20 percent, meaning it’s in a bear market, after rising as much as 50 percent this year.

Dramatic moves are even being seen in the currency markets. Investors are diving back into the Japanese yen and selling off U.S. dollars, Australian dollars, euros and global equities.

These trades are all attempts for investors to position themselves ahead of the anticipated unwinding of the Federal Reserve’s quantitative-easing program. As summer turns to fall, and a growing number of investors begin to accept the reality of that policy shift, expect these recent trends to continue — and even to accelerate.

Piling on, the BIS this year is rolling out a set of capital controls called Basel III, which will curtail lending by forcing banks to hold more reserves, among other requirements. The Organisation for Economic Cooperation and Development says the move will slow global economic growth, and the U.S. community-bank trade group warned that loan and mortgage rates will rise because of Basel III, which, incidentally, is the third attempt to stabilize global banking in the past 20 years.

So, over the next couple of months, investments like the ProShares Short 20+ Year Treasury (NYSEARCA:TBF) will do well as yields rise and prices fall. The U.S. dollar is likely to strengthen, putting even more pressure on commodity prices. That, in turn, will hurt countries reliant on commodities. So you may want to consider an inverse emerging-market ETF such as ProShares Short MSCI Emerging Markets (NYSEARCA:EUM) as money flows from the periphery to core markets.

Doug-DavenportWritten By Douglas Davenport From Money And Markets

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