The bull market seems to go on forever… Last time around this report looked at the absence, or perceived absence, of inflation. Continuing with that theme, the chart below shows a striking reality…
Source: Real Investment Advice via @ParanoidBull on Twitter
Stocks continue to move relentlessly higher despite mixed data in and outside the US. Since the last issue, some more worrying macro numbers have been published. However, it appears that as long as the central banks are willing to continue using extraordinary measures, the market will ignore past bad data. This is especially helped by the US Executive constantly pushing an easing narrative. Two clear examples this week are the one from Larry Kudlow (White House economic advisor) saying in a television interview on Monday that “The Fed is independent, but they have been themselves talking about coming and lowering their inflation target, which might mean a lower interest rate adjustment on their own timetable” and Mr Trump calling on the Fed to cut rates by 1% urging more quantitative easing. True to his style he posted a two-part tweet to say how if the US monetary policy was looser, the economy would “go up like a rocket”.
Quoting the always excellent Ben Hunt from Epsilon Theory “they are not even pretending anymore” and even the market is starting to question if the bull market will ever end…in an interview with CNBC, Chamath Palihapitiya, a VC whose endeavours include Social Capital, Facebook and the Golden State Warriors, he said “I don’t see a world in which we have any form of meaningful contraction nor any form of meaningful expansion. We have completely taken away the toolkit of how normal economies should work when we started with QE. I mean, the odds that there’s a recession anymore in any Western country of the world is almost next to impossible now, save a complete financial externality that we can’t forecast.” A lack of downturns is not necessarily a good thing, Palihapitiya added and he criticized central banks for refusing to allow normal economic cycles to play out.
No wonder that Steve Schawarzman, CEO of Blackstone, said this week that raising $43bn in the first three months of the year was like having an “out-of-body experience” when compared to fundraising when he started the firm in 1985. Blackstone have $512bn of assets under management (yes, that’s half a trillion) and Mr Schwarzman doesn’t see any signs of a downturn at companies it owns or invests in: “I don’t know why there was this huge drumbeat in the fourth quarter”.
When one sees these headlines and stories and combines them with the recent surge of questionable Tech IPOs, it is clear that the money from Central Banks is rampant and looking for somewhere to go despite the flurry of global economic warning signs around the world.
We know that the markets rarely move immediately at these sort of points, however, care must be taken over the next months if markets become more overvalued and the global economy continues to deteriorate. Crises in Turkey, Argentina and Venezuela continue to receive little attention. As long as the Fed stays easy and the hope is that the next rate move will be a cut (either now or in a few months), markets will continue to buy and believe.
This, of course, takes us to unchartered territory and we should reflect on whether there is any history of Central Banks ever conquering and vanquishing business cycles…There will be another global recession sooner or later and whether they want it or not. For those that believe that it will happen and that the solution comes from Central Banks I highly recommend the article published by the IMF blog last week. The ramifications of this IMF publication are profound. It focuses on the elimination of cash and, if not, the forced devaluation of cash versus electronic money held in bank accounts: “The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. This conversion rate is key to the proposal. When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money. The value of cash would thereby fall in terms of e-money”.
This would ensure, apparently, that people would not withdraw cash from the system and would instead pay a “lower” rate of negative interest to help stimulate an economy in recession. Whether that would be the case is pure guess work as economists have a terrible record of predicting human behaviour.
Whatever the actual outcome of such a policy, the allure of gold would be extremely appealing. For the moment, it trades in a benign range. However, if the monetary authorities really increase their policies even more aggressively then it should break out of this range to the upside.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.