Most of the market and economic news of late continues to fit into the longer term themes we have been discussing for quite a while and that is surprising to many investors. The Fed is already backtracking from its hawkish tone. Even some of the most ardent defenders of extreme monetary meddling have become exasperated with the economic and market dysfunction that it has produced.
That is an interesting turn of events.
Central bankers across the globe tried enormous quantitative easing measures and zero rate policies for a few years to avoid facing the problems they created in the last cycle. Because high debt levels across global economies are choking off growth, GDP is much lower than that which was achieved for many decades in spite of these efforts. Monetary policies led to the buildup of additional problems like massive overproduction in China, too much crude capacity in the U.S., and bubbly prices for real estate in many cities across the planet. Slowly but surely, these issues are surfacing.
Importantly, it seems that, for now, additional attempts at “goosing” markets with new policies or dovish rhetoric are not having the bullish effects they once did. For instance, market rallies after Japan announced a move to negative rates and the ECB mentioned even more QE only led to short-term euphoria that quickly faded.
Many financial assets and real estate globally reflect valuations that are still much too high relative to the earnings streams that ultimately support them in a “greater fool theory” with blind faith in the magic of QE. The declining credibility of the bankers should be troublesome to those who hold these assets and trusted investment decisions to the notion that no price is too high when monetary policy is profligate and money is free. Our greatest concern over the last few years has been the day of reckoning that would come when investors realized they had duped themselves into believing that any of this monetary craziness would really work or justify their reckless investment activity.
We may be near that point.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relation.