The results of the Brexit referendum in the U.K. proved to be the catalyst for the Bank of England (BOE) to promise more monetary stimulus. It was already going to happen, and the economic requirement for it was largely the reason for the referendum results.
The European Central Bank (ECB) is on the verge of having to figure how to provide additional stimulus, as well. And the Bank of Japan (BOJ) is on the verge of having to do the same, given the Japanese economy is experiencing deflation again.
The only major central bank that isn't in this phase with this global phenomenon is the U.S. Federal Reserve.
As I've been writing about for a long time, that too will have to change and the Fed will have to reverse course on its telegraphed expectations of increased growth and the need for rate hikes.
The strange situation there is that it appears that virtually everyone involved in the capital markets in the world is aware of this inevitability, except the members of the FOMC.
This is clearly obvious in the simultaneous rallies in equities, bonds and precious metals over the last four days, which is even more impressive considering the fourth day of the rally is ahead of a three-day weekend in the U.S.
Gold has gone to a two-year high and the 10-year Treasury yield to a new all-time record low. This is a normal but Pavlovian response by traders to the expectations of more global monetary stimulus. It is also in anticipation of the Fed having to capitulate to the need for further monetary stimulus in the U.S.
It will be most interesting to see how and when the Fed manages to extract itself from the failures of the models it has used for anticipating rising economic activity and the need for raising rates and transition back to the stimulus mode again.
The capital market response, however, is rote and not an indication of increasing optimism that additional monetary stimulus anywhere will prove this time to be the catalyst for an increase in economic activity that warrants a pre-emptive increase in equity values.
The principal economic justification for "don't fight the Fed" attitudes and, more broadly, don't fight the central banks, is that providing stimulus will increase consumption and economic activity, which will lead to a virtuous economic cycle.
From an economic perspective, monetary stimulus works in two phases.
The initial phase is intended to cause pent-up demand to be actualized. That is, to coax consumers with both the immediate desire and capacity to consume. That's accomplished by increasing their confidence by way of increased liquid asset prices afforded by the stimulus, coupled with lower debt capital costs that are available.
If that proves it is not enough to cause a positive shift in economic activity, the next stimulus phase is targeted at pulling forward future demand. That is to prompt consumers, who don't believe they have an immediate ability to consume, to overcome their fears and spend money now, rather than in the future.
The principal issue for investors to consider, as traders push equity prices higher, is whether or not there is any demand left to be pulled forward at any level of interest rates.
As I've written about in several previous columns, there is no demand left to be pulled forward and that any increase in demand must now come from fiscal stimulus. There are not enough consumers left with capacity, or expected capacity, to purchase big-ticket items requiring debt financing, which is necessary to cause economic activity to increase in houses and autos.
Anyone who can buy a house, with mortgage rates at three-year lows that rival the 50-year lows of about 3.5% for a 30-year fixed rate, is not waiting for the Fed and markets to drive those rates down further to 3% or 2.5%.
The problem with enacting fiscal stimulus to drive demand is that there is no political will yet to do so. A market or economic crisis that politicians can respond to, similar to a Lehman-type event, is what is needed to create the political will necessary for fiscal stimulus to be enacted..
At this stage, I believe everyone is simply waiting for that to occur and that equity traders are of the opinion that they'll be able to see it ahead of time to exit long positions, or hedge on the short side for gain or loss mitigation, as the crisis unfolds.
As this process emerges, I think it's probable that the Dow Jones Industrial Average and S&P 500 Index will experience blow-off tops that put in record highs, with great media fanfare.
I still think the safest and most prudent place for most investors is gold, though.