For years critics of central bank policy have been dismissed as negative nellies, but the ugly truth is staring us all in the face: Market advances remain a game of artificial liquidity and central bank jawboning and not organic growth and now the jig is up. As I’ve been saying for a long time: There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of central banks. None. Zero. Zilch.
And don’t think this is hyperbole on my part, I will present the evidence of course.
In March 2009 markets bottomed on the expansion of QE1 which was introduced following the initial QE1 announcement in November 2008. Every major correction since then has been met with major central bank intervention. QE2, Twist, QE3 and so on.
When market tumbled in 2015 and 2016 global central banks embarked on the largest combined intervention effort in history to the tune of over $5 trillion between 2016 and 2017 giving us a grand total of over $15 trillion in central bank balance sheet courtesy FOMC, ECB and BOJ:
When did global central bank balance sheets peak? Early 2018. When did global markets peak? January 2018.
And don’t think the Fed was not still active in the jawboning business despite QE3 ending. After all their official language remained “accommodative” and their hike schedule was the slowest in history, cautious and tinkering not to upset markets.
With tax cuts coming into the US economy in early 2018 along with record buybacks markets at first ignored the beginning of QT (quantitative tightening), but then it all changed.
And guess what changed? 2 things.
In September 2018, for the first time in 10 years, the FOMC removed one little word from its policy stance: “accommodative” and The Fed increased its QT program. When did US markets peak? September 2018.
And with the sugar high of the tax cuts fading it was too much. Add trade wars and global growth slowing it was more than markets could handle.
And so yes, the timing was perfect and you can see it in the chart:
Who ya gonna believe, me or your lying eyes?
Global central banks did the dirty work for the Fed between 2016 and 2017 adding ever more artificial liquidity. But then the ECB slowed their QE program and finally ended it in late 2018.
How did the $DAX handle all that removal in artificial liquidity? Not well.
DAX peaked in January 2018 as the ECB started reducing its QE program.
The Fed likes to claim it is managing policy based on the economy, not on markets. But here’s the ugly truth on that: The economy these days is very much tied to market performance. Big drops in markets have an adverse impact on the economy full stop. Hence it is a fallacy to argue that one looks at one but not the other.
After all, tell me when the Fed ever hikes during a massive market correction? The answer: Never. It’s always the other way around.
As soon as markets drop all plans for rate hikes and/or balance sheet reductions come to a sudden halt:
The Fed never sees it coming.
Crude was $74+ & $SPX at 2900+ when this chatter came out.
3 months later: let’s stop everything.
It’s almost as if market price trajectory drives Fed policy. 🤔 pic.twitter.com/x4SmsNcSbH
— Sven Henrich (@NorthmanTrader) January 3, 2019
Recognizing the market’s sudden found sensitivity to QT the Fed was sure to react. After all markets were sensitive to slowing growth in China, $AAPL’s warning this week and the renewed sell-off in markets as a result.
And what did we get this very morning? The predictable jawbone:
Powell says Fed ‘wouldn’t hesitate’ to tweak balance sheet reduction
“We don’t believe that our issuance is an important part of the story of the market turbulence that began in the fourth quarter of last year. But, I’ll say again, if we reached a different conclusion, we wouldn’t hesitate to make a change,” he said. “If we came to the view that the balance sheet normalization plan — or any other aspect of normalization — was part of the problem, we wouldn’t hesitate to make a change.”
Bullshit. Of course it is and he knows that and he dangled the carrot and that’s all that mattered.
Who ya gonna believe, me or your lying eyes?
This move came on the heels of China’s overnight intervention announcing a coming cut in its bank reverse ratios by 1%.
So don’t mistake this rally for anything but for what it really is: Central banks again coming to the rescue of stressed markets and their action and words matter in heavy oversold markets.
But the reality remains, artificial liquidity is coming out of these markets:
Although the Fed, as indicated by Powell may slow or even halt their projected path. On a dime. And that’s what markets are reacting to today.
Central banks keep claiming all this is done to support growth. What growth? What has actually been accomplished?
All this intervention has not produced sustained accelerating growth, certainly not compared to previous cycles.
Tax cut sugar high aside all growth projections for 2019 are pointing to marked slowing with recession risk rising.
The only thing that has really grown as a result of all this cheap money and intervention is debt:
Corporate debt has doubled since 2007. Government debt is expanding with no end in sight having risen by another $2 trillion in the first 2 years of the Trump administration.
And so here we go again:
And central banks have already begun to react.
What’s the larger message here? Free market price discovery would require a full accounting of market bubbles and the realities of structural problems which remain unresolved. Central banks exist to prevent the consequences of excess to come to fruition and give license to politicians to avoid addressing structural problems. And by preventing these market forces from playing out at each sign of trouble the can gets kicked further and further down the road. Each successive recovery keeps the illusion alive but the jingle is getting tighter and tighter each time around and requires ever lower rates before the monsters return. In the meantime debt keeps expanding while each recovery produces less and less organically driven growth, but ever higher wealth inequality. This is what this system produces.
And that’s the ugly truth. But you won’t hear it from the Fed.
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Great article. I have one question though, when everyone figures out the FED is stuck in debt perpetuity are all the dollars going to get dumped fairly fast? Trying to gauge how quick I can get out of dodge before the party starts. I’ve held non dollar denominated assets and it gets boring over the years. Thank you!
And then, with all this interventionist behaviour, isnt US comparing with china??? There is no free market, no capitalism, and with every little step back they step in to save the day…
almost like eastern europe where comunists were stating huge numbers and increasing wealth of a nation when everyone actually was starving…
It’s an interventionist market with most economic going to the fewest people, hence the vast wealth inequality expansion
Best thing for me last year was following you on twtr… really, like schooling myself all over again 😀 thank you!
Utopia, Capitalism requires that failed and failing enterprises fail, including banks. That’s how the system is reset or refreshed. This “no burn policy” or repeated bailouts of the well-connected by their govt cronies is not capitalism as you suggest. It’s corruption.
For 70 years, the US forest service had a “no burn” policy of not allowing any fire on Federal lands. Then, like government often does, it lurches to a “let it burn” policy in 1989 and a good portion of Yellowstone Nat’l Park exploded in flames that year. (I was there that year!).
I think there will be a similar conflagration at some point. I think it’s happening now and Powell doesn’t understand that the balance sheet reductions AND the FF hikes are reversing abundant liquidity (tinder?) and causing the stock market declines. These people, and basically all the people in government, don’t know what they’re doing. So many people in government are there because they couldn’t make it in the private sector. Same for academics like all those at the Federal Reserve PhDs. They have been wrong at everything for as long as I’ve been alive. This is why the founding fathers were obsessed by limiting the power of government so that Idiots in governments can not ruin everything — which is happening in EVERY aspect of our nation’s life (because the failing, flailing, corrupt, incompetent government has their hands in EVERYTHING and everything they touch turns to sh*t.
I’m not a Repub or Dem. I’m a revolutionary and I advocate a 50 to 60% reduction of Federal employees and eliminating, outsourcing, downsizing and privatizing every department including defense. In reality, we really need to BURN IT DOWN and start over. One way to do that would be for the President to hold the line on the debt limit. ie,, NO MORE DEBT. This would require massive real (not just reductions of projected spending growith) cuts in everything including price reductions to drug companies, hospitals, defense contractors, etc. I know this will never happen, but if it did it would cause a massive depression, massive deflation of medical prices, rent and everything else. In other words, it would be the massive reset needed to bring prices back to levels that people can afford. It’s pretty obvious that a massive reset is needed since the bottom 90% of worker’s wages will never catch up to inflating prices—which is what we’ve been seeing for decades now.
That’s right, what this nation needs is a big fat ugly depression. And it’s just what is needed. But for it to happen, the Federal Reserve needs to be abolished NOW. This way, they can’t do all the money “printing” and helicopter money and secret bailouts — so prevents a full reset, ie., a huge deflation. We cant allow the Federal bureaucracy to rescue the failed Federal bureaucracy at our expense! BURN IT DOWN!
On that note, have a nice day! LOL.
Thanks Sven, for the great article, when the shoe drops it won’t be good for anyone, anywhere,
We once was a country that made things people could buy, now we make paper, we still have a lot
going for us (USA). And thanks to the hard work of people who employ other people, It seems everyone is trying to figure out a way to game the system, instead of good old fashioned yankee
ingenuity, and hard work. In the vietnam era, our vets came home to good paying jobs, what the hell do they come home to now.
Thx Joesph. Agreed, the ultimate unraveling will not be pretty.
Hi Sven, so what is the end game here? QE to infinity and stock price to the moon?
The end game is as it has been since the beginning of humans….war! It is the one activity history say that you CAN bank on. The question should be when, not what.