Investors who want guidance repeatedly have turned to central banks for investing information.
Most of us can recall Alan Greenspan’s chairmanship of the U.S. Federal Reserve. His tenure was notable for its mistakes and guidance that entailed a disaster. When it was suggested that housing prices were in a bubble, he replied that no one could determine if that was right, and even if so, it would promptly self-correct.
More recently Ben Bernacke became the U.S. Fed chair. He was notable for saying, probably tongue in cheek, that if the economy needed a stimulus, the government could fly over the nation with a helicopter and drop currency, which would be picked up and spent, reviving the economy.
Both Greenspan and Bernacke claimed to be so self-satisfied with their term in office.
Today, the U.S. has Barbara Yellen, who has repeatedly stated for more than a year she was on the verge of raising interest rates. All her pronouncements temporarily rattle markets. The public should act more intelligently as the threatened 25 basis point, or ¼ point, in interest rates was very insignificant.
Any review of central banks’ actions shows a crazy quilt pattern of up-and-down zigs and zags revealing total confusion. Up to the 1950s, the dividend yield exceeded the rate of interest on bonds. Common stocks were considered more risky than bonds. Confounding this perceived opinion, the bond market out-performed the common stock market, a trend that persists.
It was widely recognized after the Great Depression that the stock market could collapse, so gradually investors turned to the bond market. With various central bank chair people pouring funds into the bond market, the latter’s performance outdid the stock market.
Nowadays, as the leaders of North American central banks repeatedly predict that interest rates will be increased, most investors remain scared to place too much of their funds in the bond market.
All of this pre-supposes that the U.S. Federal Reserve and the Bank of Canada know what they are doing. With 200 trained economists on its staff, the U.S. Fed has revealed its utter confusion. Furthermore, by its history of supplying excess liquidity to the economy, it has been the paramount engine of inflation.
The head of central banks in North America have proved to be all too human and fallible. Hence, those seeking guidance must look elsewhere.