Years ago, central bankers were considered to be among the world’s worst traders.
George Soros made billions of dollars betting against the Bank of England in 1992. The Bank of Japan was singled out for criticism by Alan Greenspan, then the Chairman of the Federal Reserve, for spending hundreds of billions of dollars in a futile effort to influence exchange rates. A crisis of faith in central banks pushed stocks down quickly in 2008.
At some point in time all that changed. Since 2009, central bankers have become the best traders in the world.
They want stocks to go up to stimulate economic growth through the wealth effect and they got their wish. They want commodities to decline so inflation will remain low and they got their wish. They want interest rates to remain low and they got their wish.
The question now is whether or not the market genie granted central bankers more than three wishes. Greece could show us whether or not central bankers will maintain their market winning streak.
Central banks have the largest exposure to Greek debt. If Greece defaults, they will feel the greatest pain. But more important than the monetary losses could be the psychology behind the loss. Investors might start to realize central banks are not all powerful.
Greece’s default is trivial from a dollar perspective but could mark the beginning of the end of the illusion that central banks are able to control the global economy. When that happens, market forces will take over and overpriced stocks will fall.
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