The following is excerpted from Elliott Wave
Internationalís Global Market Perspective. The full 120-page publication, which
features forecasts for every major world market, is available free until April
Visit Elliott Wave International to download it free.
Conventional wisdom says that central banks
can influence or even direct financial markets and the macroeconomy. The very
existence of Elliott waves challenges such assumptions. For if markets responded
to every central bank directive, how could Elliott waves exist? Parallel trend
channels, Fibonacci price relationships, the similarity of form between waves of
different sizes and time periodsónone of that would be possible. Central bank
decisions would have to coincide perfectly with turning points in Elliott waves,
and we know that just doesnít happen. But even without using waves, we can
expose the conventional wisdom for the fallacy that it is.
Take, for example, this assertion in a recent
article in a U.K. economic weekly: ďPart of the aim of central banks in driving
down interest rates is to encourage a greater risk appetite among investors.Ē
Two key assumptions underlie that statement: a) central banks determine interest
rates; and b) lower interest rates can increase societyís appetite for risk.
To see how the first assumption is false,
letís take a look at the daily chart of Australian interest rate data. It
duplicates a study that Elliott Wave International has often done with U.S.
interest rate data. It shows how movements in the cash target rate set by
Australiaís central bank, the Reserve Bank of Australia (RBA), appear to follow
those in 3-month Australian Treasury Bills. After decisive moves up in T-bills
from 2006 to early 2008, for example, the RBA faithfully raised its target.
T-bills have since led the RBA during the financial crisis of the past year. In
fact, the record indicates that the RBA almost always follows T-bills over time.
The proper conclusion to draw is not that the
RBA has orchestrated the decline in rates since the early 1980sóbut that itís
been riding it. During good times, central bankers look like geniuses; during
bad times, they get tarred and feathered. Closer to the truth is that their
interest-rate decisions are not proactive, but reactive, and that they
continually follow in the footsteps of the market for lack of any other useful
Now letís look at the second assumption: that
lower interest rates increase societyís appetite for risk. A simple glance at
the weekly chart shows this assumption to be false. After the 1987 crash, the
ASX All Ordinaries actually rallied for two years on rising rates and then sold
off through 1990 on falling rates. Stocks then rose in 1991 on continued falling
rates and sold off in 1992 on even lower rates. Continue following the chart to
the right and you will see that there is no consistent correlation between the
direction of interest rates and that of the stock market.
The myth of central bank potency is so
pervasive that conventional analysts canít even imagine a better explanation for
price trends: that the market is the dog wagging its central bank tail, not the
other way around.
For more information, download Elliott Wave
FREE issue of Global Market Perspective, available until April 30. The
120-page publication covers every major world market, global interest rates,
international currencies, metals, energy and more.
Mark Galasiewski is the editor of Elliott
Wave Internationalís Asian Financial Forecast and member of EWIís
Global Market Perspective team covering Asian stock indexes.