When will more stock investors figure out that what they thought to be Fed omnipotence over the last ten years was largely a function of several factors that it did not control? This is an important question because central bankers across the globe have moved into overdrive to try to keep stock index levitation in place as economic fundamentals deteriorate and the U.S. trade battle with China escalates. Meanwhile, more stocks are in bear markets with each passing day.
The inversion in the yield curve with collapsing Treasury rates is a harbinger of weaker growth. The curve has failed to steepen in response to Fed easing. It seems that just about everything from bonds to commodities is pointing to trouble ahead, but U.S. indices refuse to acknowledge increasing risks. We have seen this near the ends of past cycles including 2000 and 2007 with U.S. equities at similarly stretched multiples of GDP.
U.S. treasuries are flirting with record low yields on growth worries and $16 trillion of global debt trades with negative yields. This speaks to how miserably central banks have performed in recent years. Riots in Hong Kong and renewed Brexit fears are not helping matters. Argentina’s markets collapsed once again this week in an historic plunge.
We reiterate the point that much of the negative-yielding debt involves the masking of credit risk as the ECB bought the sovereign issues of the weakest nations in Europe to keep the system there afloat. Capitalism is not supposed to involve lending at rates below zero, but that’s what it takes to maintain the status quo these days. We have to laugh at those who say negative rates are no big deal. Being paid to borrow money shows how convoluted the “solutions” have become. YEAH.
While we were once taught that the key to sales is to Always Be Closing (ABC), Always Be Easing or ABE has become the central bank rallying cry over the last decade. The PhD’s have no game plan other than doing more of the same. As keeper of the world’s critical reserve currency, the Fed led the charge into this tragedy because it never normalized and declared victory without reversing policy. You don’t typically win games in the fifth inning.
We live in a world where many investors feel compelled to remain invested on an unhedged basis in securities that offer low expected returns only because they have been taught to believe risks can be contained by monetary policy or they decide they have no other choice. Were it not for a shrinking group of still favored mega-cap stocks mostly in tech land, market sentiment would be much worse with investors irate at the Fed for having crafted such a distorted landscape. In a sign of the deteriorating backdrop, each day we find more stocks in numerous sectors becoming interesting on the long side as they fall completely out of favor.
Nothing the central bankers did worked in the way it was predicted, but the propaganda is designed to keep that fact hidden because monetary policy is the only thing that can be controlled. It’s mostly a charade designed to encourage risk-taking.
The Fed has completely wedged itself into the tightest corner we can recall in thirty years of following the PhD’s in the Eccles Building. It simply can’t “not ease” or markets will rebel in a big way. At the same time, all they have at their disposal is what was once thought to be powerful medicine, but it has demonstrably proven to fail in producing additional growth.
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