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:
— European Central Bank (@ecb) March 12, 2019
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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Author: Tyler Durden