The Great Dichotomy: Global Economy at the Precipice; in Panic, Central Banks Flood World with Liquidity, Global Stocks Soar!
We are at a threshold of something unseen in history. Aside from negative policy rates, the record volume of negative-yielding securities, previously inverted yield curves, record repos, central bank balance sheets, and many more, the great dichotomy has been the record-setting global stock markets in the face of a sharply decelerating global economy.
If you haven’t been tuned in, inspired by the recent melt-up of US equity markets, the MSCI World Index hit an all-time high last week.
In the US, the participation rate hasn’t been 100% for the major benchmarks. While the NYSE Composite (NYA) is at its record resistance, the Dow Jones Transportation Average (TRAN), the small scale Russell 2000 (RUT) and its counterpart the S&P 600 (SML), and the mid-cap S&P 600 (MID) remains distant from their previous respective apexes.
Meanwhile, developed markets have outperformed as MSCI Asia, emerging markets and the UK have lagged. (Yardeni.com)
What’s striking has been the path deviation between the path between stock prices and the real economy as shown by the Global ISM index.
And stocks are soaring despite OECD’s leading indicators and world trade activities have been flashing red!
Interestingly, even the S&P 500 seems to have deviated ridiculously from its fundamentals: falling revenue growth and contracting income that has reflected on the general corporate profits after tax (excluding inventory valuation adjustments and Corporate Consumption adjustments). The aberration has spread to even Perma-bull Ed Yardeni’s favorite boom-bust indicator (CRB Raw Industrial prices divided by initial unemployment claims)!
And along with the ongoing strains in the repo market, which has prompted the US Federal Reserve to reactivate its $60 billion (not QE) T-bill purchases, global central banks have embarked on a joint campaign to ease by cutting rates: (from Charlie Bilello) Rate Cuts in 2019... Fed: -75 bps ECB: -10 bps Denmark: -10 bps Australia: -75 bps Brazil: -150 bps Russia: -125 bps India: -135 bps China: -16 bps Korea: -50 bps Mexico: -75 bps Indonesia: -100 bps Philippines: -75 bps Thailand: -50 bps Chile: -100 bps Turkey: -1000 bps
As such, the Fed’s balance sheet has spiked, which helped stoke its money supply growth.
Over half of the global central banks have eased. The FED’s $ 286 billion balance sheet expansion (as of November 13) surely fired up the S&P 500.
And the easing measures undertaken by global central banks have had divergent effects; liquidity in developed markets have bounced while emerging markets have yet to respond.
Nonetheless, the global money supply has been ramped along with the MSCI world index, even as the soft indicator, the economic surprise index continues to tumble!
In spite of these collaborative measures by activist central banks to prevent a downturn, the astonishing escalating deviation between financial assets and the real economy should highlight the speculative blowoff phase of the current market cycle.
Higher asset prices, it is held, generates liquidity that may push exposing imbalances down the road. However, with global debt rocketing to top $255 trillion, credit markets haven’t been as convinced as the stock markets that flooding the world with liquidity would suffice.
However, US Junk bond’s widening spreads seem to signal growing investor aversion towards risky credit.
Instead, such distinction reveals the extent of the erosion of real savings with the continuing buildup of excess capacity, debt saturation, expanding Ponzi finance or zombie companies, the conspicuous lack of investments, and the excessive fixation on chasing yields as symptoms.
Diminishing returns from the sweet spot from such joint interventions by central banks would arrive earlier than most expect, trade war or not.
[cross posted at the prudentinvestornewsletter]
