Central banks still hold all the cards as economies struggle to hold together

Given the U.S. Federal Reserve's latest musings on Thursday about how long it can safely sustain its current super-easy monetary policy, that's not as unambiguously positive as it proved over the past 18 months.

Just a look at the jump in 10-year Treasury borrowing rates to 8-month highs early on Friday gives a glimpse into what might happen if dissenting views within the Fed spread when jobless rates ease closer to its now stated target of 6.5 percent.

An unchanged U.S. unemployment rate of 7.8 percent in December may suggest that's a story for another time, but the episode does underline that central bank policy more than any other factor will continue to dominate global markets' direction for the foreseeable future.

Relentless bouts of global monetary support via money printing, bond buying, cheap central bank loans and currency market intervention overwhelmed stock and bond markets everywhere in 2012 to lend a decidedly bullish hue to markets otherwise still riven by fiscal, political and economic stress.

If you'd ignored pretty much everything else last year and bet solely on the determination of the “Big 4” central banks — the Fed, European Central Bank (ECB), Bank of Japan (BOJ) and Bank of England (BOE) — to doggedly pursue market stability and economic reflation, then you'd have done handsomely.

Put another way, it was simply the hoary old adage of “Don't fight the Fed” — or more accurately, and perhaps more ominously: “Don't fight the Fed, ECB, BOJ and BOE.”

“The Fed, the ECB and the BOJ are more aggressive with their QE (quantitative easing) operations than at any time in history,” said Stephen Jen, head of eponymous hedge fund SLJ Macro and long-standing skeptic on the efficacy of central bank money printing.

“Even I am turning more optimistic, but still cautiously so,” he told clients earlier this week. “The path of least resistance for risk assets remains up for now.”

You didn't have to be terribly discriminating last year in what assets you chose or even have a firm conviction on the long-term success of the extraordinary central bank activity.

The broadest measures of both developed and emerging stock markets as well as both investment-grade and “junk” bonds all returned 10-20 percent last year. And even the so-called safe havens of U.S. and German government bonds and gold got swept up in the slipstream — returning at least 5-10 percent too.

Only if you were still stuck in cash — where real losses in U.S. dollar bills over the last three years have been bigger than even the 1970s — would you have continued to bleed money.

Within the hedge fund universe, those funds looking at basic value and growth strategies or emerging market plays significantly outperformed the typically more tactical and nimble macro funds or the often model-based trend followers.

Yet this “something for everyone” asset market upshot is the clearest illustration of the overpowering influence of central bank intervention and one that unnerves many skeptics — if only on the crude but sensible assumption that central banks won't intervene forever.

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