In 2019 central banks once again succeeded in masking all the underlying problems in the economy, the underlying structural problems of debt, deflation and demographics, and the slowing of global growth and offering the pretense that 2019’s policy responses were nothing but a complete system failure acknowledging that markets can’t stand on their own two feet without central bank intervention. In process asset prices were artificially inflated across the board and valuations pushed far above the growth and size of global economies and volatility once again compressed.
2020 is then all about whether control over asset prices can be maintained and whether reflation can be achieved to support exaggerated asset prices or whether failure on either count will bring about the great unmasking of the largest asset bubble since the year 2000.
Optimism is high for 2020 and bulls enter the year in full control. The price target charade offers again positive outlooks despite all economic and growth projections having been off base.
Trust is placed in a phase one China trade deal to be signed on January 15 that nobody has seen or read or has any insight into specifics as to how it will bring about reflation.
Trust is placed in an administration keen on continuing to push asset prices higher into the US November election, even outlining specific asset price targets. (DJIA 32K).
Trust is placed in central banks to keep all troubles contained and to continue to “calm markets” as unexpected events such as the most recent Iran crisis pop up.
Markets are priced to perfection and the first quarter is likely to see a larger first correction. The historical script suggests that the first sizable correction of 2020 will get bought for a new rally to either new highs or lower highs.
It is the unfolding of economic data and earnings throughout the year that will then need to show evidence and match the high expectations priced into markets. Without such evidence markets and global economies may well proceed on the path of the great unmasking that the structural economy has been pointing toward for a while.
While central banks have successfully again kicked the can, they have yet to prove that reflation can be achieved. Non confirmation signals keep increasing as does the list of factors that need to be ignored to keep the ‘it’s different this time’ narrative alive.
Join me in this week’s market video for an in-depth discussion of technicals and key macro factors/concerns that suggest risk may be greatly misprized :
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