The biggest cloud on the horizon for global markets

The biggest cloud on the horizon for global markets, by Robert Gottliebsen. A mainstream commentator acknowledges recent market manipulation by the central banks — in addition to setting prices of overnight interest rates, which is their ostensible job. There are no markets anymore, just interventions.

It was no coincidence that the share markets bottomed in March 2009 when the US Federal Reserve began pumping money into the economy, buying bonds in what back then was called termed “quantitative easing, part one” or QE1. Every major sharemarket correction since then has been reversed with the help of a new round of “quantitative easing”. And it has worked.

Most recently, and not surprisingly, when global sharemarkets tumbled in 2015 and 2016, central banks embarked on what was arguably the largest intervention in history. The US Federal Reserve, the European Central Bank and the Bank of Japan injected more than $US5 trillion into their economies between 2016 and 2017 via various QE style programs. The total injections made since 2009 total more than $US15 trillion. [This is not small. The total world assets are $US 400 trillion; the world GDP is $US 75 trillion.]

There is no doubt these massive interventions pushed up asset prices and often pushed down the exchange rate of the more aggressive countries. It also boosted real output growth but nowhere near the same extent as the rise in asset prices. So, in a reversal of quantitative easing — the so called quantitative tightening (or QT) — asset prices are vulnerable. …

Like in the interest rate or bond markets, stock market prices now mainly reflect the actions of bureaucrats rather than the wisdom of the crowd. What could go wrong?

Early 2018 the total holdings of central banks peaked. So it was no surprise that global markets also peaked around the same time, because QT reverses the asset price boost of QE. …

President Trump believes the Federal Reserve has got it wrong and if it were to continue with a money squeeze and higher rates there is grave danger the twin actions will create a US recession. …

If the US continues with QT and higher interest rates there will almost certainly be further share market falls. Taken to the extreme the combination would create of a US recession. …

The main job of an investor nowadays is to anticipate the actions of bureaucrats:

I emphasise again that the US bond market is predicting that the Federal Reserve will wake up to the danger and stop raising rates and indeed lower them.

The age of big government has squeezed the vitality and magic out of markets, leaving only the stupidity of politically-inspired allocation of capital. Good one, comrades.