The market crashed and then it rallied. For those who hoped for a V shaped recovery, here it is. Sadly it’s a fake. Its not a recovery it’s a rally. A recovery is not the same as a rally. The world economy has not recovered nor is the market looking out to the future for a recovery. The market has bounced because the Federal Reserve has corner the market with an impulse of money never seen outside of scenarios of hyperinflation such as the German, hugarian and untold South American inflations of the past.
It doesn’t matter if its right or wrong, good policy or bad, it is simply the cause.
Here are the charts.
As goes the Federal Reserve’s balance sheet so goes the stock market.
Of course, correlation is not causation…. Only kidding…. The Federal Reserve didn’t just pump trillions of assets into its balance sheet and trillions of cash into the world for nothing. It was exactly to saved America and by derivation the world from economic implosion. They have achieved that and have now taken their foot off the accelerator to a great extent.
Now the aftermath of the global lock down will unfold.
The central banks of the world can keep pumping money but that would lead to the chaos of hyperinflation. They have to stop at some point and then they risk the comeuppance of an economic hiatus that appears to be stretching on across the summer and perhaps even as far as the winter.
Liquidity has a political calculus. Asset inflation for the rich, house price inflation for the middleclass and jobs, and jobs and social benefits from tax for the working classes. It works but it is not an infinite cornucopia, too much secret sauce and the economy goes off the rails into uncontrollable bubbles.
This looks like the high and now the central banks will try to keep the markets in a stabilised trend so the healing can commence and catch up with the market.
So the market will go this way
…we can only hope.
However, aftershocks are coming, so if the dam breaks be will get here:
This is not a clairvoyant prediction just a sketch of what an aftershock could look like.
If we get this then the only option will be for the Fed to buy stocks and effectively start to nationalise the stock market as it is a goodly way through nationalising the bond market.
Japan has done it, the Swiss do it but with other countries stocks in an attempt to have a lose peg with major currencies. It is not as outlandish as it sounds.
However what it will mean, is a transfer of wealth from citizen to state, hard assets for government IOUs. In a sense, so what, what we need to know is how the coming months pan out.
The question is, will the US go another $3-5 trillion in the hole to keep the market high or will it let it implode and bail it out from a post purge position.
I think no, it will go all in when the aftershocks hit.
Then what?
Reset.
There has to be a reset one way or another because of the global scale of the disruption.
That means either asset values go up in smoke or the value of money goes up in smoke. It is effectively the same thing.
If the world dives back into activity and tries to make up lost ground then we could avoid a depression but that does not seem to be on the cards. The signs are all their that the unlocking of the global economy is going to take months. Just looking at travel is enough to see that the return to normality is not going to be fast.
Unlikec 2007-2008 the contagion is not going to come from one sector, its going to come from many. The economic contagion is not going to come from one country and sweep the globe its going to be coming from everywhere at once.
Imagine there was a country that didn’t lock down and was untouched by the virus. What would there future economic future be looking like? You would think it would be dire because all its trading partners were in trouble. You would expect a bad recession. Now layer that with the incalculable outcomes on the lockdown and you have a multiplier.
So when the central bank printing stops, down will go the markets. Then we will find out if we are in for the third leg of the W pattern, a drop or the capitulation into the void of a 1929-1932 bear market.
We will likely know by the end of June or at the latest July.
Lets hope the world goes on a spending frenzy. It’s the only hope.