Why 2015 resembles 1987 before Black Monday: central banks and rate hikes

After the radical plunge in the global stock markets in August, the stock prices rebounded once and are seeking its direction after this turmoil.

Investors are carefully watching what the central banks will do. Some of them first even expected the Fed might restart the QE, but after the Fed policymakers revealed to remain seeking a rate hike, this kind of subjective hopes disappeared. We already explained why they would remain hawkish:

How about the other central banks? The Bank of Japan still remains silent. The European Central Bank was slightly dovish on the meeting on the 3rd of September, yet it just repeated that it would expand the QE if necessary.

The things seem unchanged during the turmoil, but there is one thing that is surely changing: the cooperation of the central banks is gradually becoming unable to function, and we must take this change seriously, as it was the very cause of Black Monday in 1987:

What the central banks are thinking

What are the central banks thinking and why aren’t their policies compatible? As we explained in the mentioned article, the Fed’s aim is not to become later than the other central banks to raise the interest rate, so if the financial markets allow, they don’t want to delay their first rate hike.

On the other hand, the Bank of Japan doesn’t want to expand their QE before the Fed’s rate hike for the reason we explained in the following article:

The BOJ wants to hold the option to deal with the possible turmoil in the markets after the Fed’s rate hike. If it expands the QE before the rate hike, they will lose the means.

Hereby, we figure out that none of them want to go dovish earlier than each other. The countries should be communicating during the turmoil, implicitly imposing the role to ease to each other.

Remember Black Monday

This kind of conflict between central banks remind us of Black Monday in 1987. We explained the cause of Black Monday in the following article:

Before Black Monday, the dollar was on a radical downtrend. Worried about the weak dollar, the US held a meeting with the other developed countries to support the dollar, where Japan and Germany agreed to cut the interest rate, whilst the US was to move for a rate hike. This is called the Louvre Accord.

However, Germany feared the potential inflation in the country and decided to raise the interest rate despite the agreement. As the US stock market was fuelled by low interest rates, the Fed’s rate hike was only possible slowly with the rate cuts of Japan and Germany. With the rate hike of Germany, however, investors considered the US would need to raise the interest rate more rapidly than expected, and therefore dumped their US stocks on Black Monday. It was a situation where central banks had to compete to raise the interest rate.

Will Black Monday happen again?

We are not expecting the collapse of the global QE bubble in the near future. The current turmoil is not the end of the QE bubble as we discussed in the article below:

In addition, as long as it isn’t the situation where investors run away from any kind of assets, we assume the central banks should be able to somehow cooperate for now.

Not yet but near

Thus, this is not the point of a collapse yet, but this is the first symptom for it. Investors will have to carefully watch the relationship between the central banks, and if they realize any serious conflict between them, that is when the game is over.

Everything that will happen is already written in the article above, but it is still difficult to survive the process till the very end. We hope our articles help our readers to survive the volatile markets.  The one above is especially important, and wish our readers read it and find it useful.