Opinion

The CONfidence Game

The global economic landscape remains weak yet there appears to be no concern on the side of bulls and investors alike, so firm is the belief that the earnings recession that is unfolding is temporary, so firm is the belief that dovish central bankers can once again prevent any downside.

I get it, it has worked for 10 years and it’s worked again seemingly since the December lows. Why pretend it is anything but central banks?

After all Jay Powell is rapidly proving to be the market’s biggest thrust driver to the upside in 2019:

From my variant perch it’s a sign of deep underlying weakness. There is no bull market without central bank intervention or jawboning. Plain and simple.

The underlying premise of it all:

There. They print money and buy assets and in process they distort the entire global price discovery process. Why? Because they have to in order to keep confidence up.

The world is one sell-off away from a global recession because market performance translates directly into consumer confidence and spending. Don’t believe me? Check this out:

In Q4 household financial assets dropped hard for the first time in a long time.

Why? Because markets dropped hard. What else dropped? Retail sales dropped 1.6% in December the biggest decline since September 2009.

Coincidence? You tell me:

Is it the economy that’s leading the horse here? Or is it the other way around? Q1 GDP is much worse than Q4 yet retail spending is higher in January. The case can be made that it is market performance and related confidence that leads spending. No accident then that retail sales bounced back a bit in January, after all we saw a massive rally following the big global central bank flip flop.

None of this is new. Indeed if you look at a longer term chart comparing growth in financial assets and growth in retail sales one can observe an apparent correlation:

The message: Consumer confidence and spending is directly related to how markets perform which is ironic as nearly 90% of stocks are in the hands of the top 10%.

The larger conclusion: If markets drop for an extended time a recession is unavoidable. That’s how closely markets and the economy are now linked. No wonder the Fed always jumps in and quickly so, it is the unspoken prime mandate:

That’s why ever new highs are needed to keep the construct going. And that’s why ever more debt is needed because without more debt the fantasy does not sustain itself.

It’s the prefect bubble spiral that will eventually collapse under its own weight.

And at what cost? It all comes at a steep price.

Via Holger Zschaepitz:

“Global debt of corporations, governments & households hit fresh record at $178tn. Debt has risen by almost $60tn since the great financial crisis, meaning that the economic rebound of the past decade, which brought a global GDP increase of $20tn, has been bought at a high price. 3 dollars of debt translated into 1 dollar of growth”:

It’s inefficient and it eventually comes with enormous consequences.

But for now they keep succeeding in keeping the boogeyman at bay. And it takes ever more debt and ever more accommodative central bankers. No new highs without dovish central bankers. And ever more debt with dovish central bankers. And that’s the big CON in confidence. Because confidence must be maintained at all costs. Or else.


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21 replies »

  1. I try to understand the reasoning why central banks can’t print money and do QE forever. Why we can’t just go higher and higher all the time. Where is the forced turning point? When you write:

    “It’s the prefect bubble spiral that will eventually collapse under its own weight.”

    I think there is a broad consensus that QE is not a solution, it’s just a tool that masks the underlying weakness. BUT why it can’t go on forever?

    • It can’t go on forever because it leads to social chaos as debt piles higher and wealth inequality grows larger. There’s a reason we have laws to prevent counterfeiting of money. Central bankers are egotistical enough to believe that when they are doing all the counterfeiting (QE) it is simply benign. Nothing could be further from the truth. They are simply shifting the goalposts for when the bill comes due, or in many cases shifting the bills onto other demographics who cannot keep up with asset inflation amid stagnant wage growth. In Laymans terms…The pitchforks don’t just come out; The get used!

  2. Technically it can go on until the central banks own everything and all the savings (pensions, etc) are transferred to the speculators via interest rate suppression. Look at Japan. Then I don’t know.

    The problem with this solution is they are not increasing future economic cash flows…

    The central banks will have to take on the weight via more expansive QE and extinguish the debt like money is created in the first place. Poof. MMT is not for socialism. It is for status quo.

    Or until a political reversal occurs which is more likely. Socialism is not required to reverse this. Much less. Just stop digging and it all caves in.

    • Why would a political reversal occur? I doubt that any politician would stop QE because at this point that would cause a recession at least. Of course, it would provide the basis of a healthier growth, but surviving a recession as a political leader with promises that the system will be healthier seems to be impossible to me..

      • Let me add, that I can be easily wrong about this and political change might be on the horizon even in the US. But I doubt that people really understand what a dramatic change that would be. And pushing through this would be a massive task with countless challenges.

        A recession might open up the way to a policy change. But with expansive QE in the toolkit, why would the current status quo would let that happen?

  3. QE has not been used by companies to improve and/or boost production. In fact, US economy is mostly focused on services now. This makes very hard to US to balance the cash flow. Chine and India are growing and the worldhas seen that. The use of different currencies rather than US dollar is a problem to US. Petrodollar arrangement is gone too. Markets are artificially moving higher with use of sofisticated algos and management of people’s pension funds on the behalf of the enterprises. One day this party will be over. To me is not far. 2021 to me.

  4. Please comment on rates. It would be great to hear your thoughts on the TNX. Bond bears are in a mild retreat so far this year. I’m a bond bull. I realize that huge supply is pending over the next couple years and beyond. But supply in and of itself is not negative. During the internet mania, ’98-’02, massive supply was always absorbed. I ran the equity syndicate desk for one of the majors back then. I’m not trying to make the case that internet ipos and T bonds are analogous! But the point is straightforward. When assets are in demand, supply is absorbed. And you can make the case, paraphrasing Hoisington, that the next bull market isn’t in equities, it’s in bonds, as the 30 year moves from 3% to 1.5%.
    Another total global debt number that’s been thrown out there is 250T and for good measure throw in global unfunded liabilities of another 750T. That’s 1Q I believe. Massive debt is massively deflationary. Deflation drives rates lower. I wish I knew when lower rates no longer help equities. But don’t we all.

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