Taking the Pulse of a Weakening Economy
Corporate buybacks provide the key analogy for the economy as a whole.
Central banks have been running a grand experiment for 9 years, and now we’re about to find out if it succeeds or fails. For 9 unprecedented years, central banks have pushed the pedal of monetary stimulus to the metal: near-zero interest rates, monumental purchases of bonds, mortgage-backed securities, stocks and corporate bonds, injecting trillions of dollars, yuan, yen and euros into the global financial system, all in the name of promoting a “synchronized global recovery” that in many nations remains the weakest post-World War II recovery on record.
The two goals of this unprecedented stimulus were 1) bringing consumption forward and 2) generating a “wealth effect” as the owners of assets rising in value would translate their perception of feeling wealthier into more borrowing and consumption that would then feed a self-sustaining virtuous cycle of expansion.
The Federal Reserve has finally begun reducing its stimulus programs of near-zero interest rates and bond purchases, the idea being that the “recovery” is now robust enough to continue without the extraordinary monetary stimulus of the past 9 years since the Global Financial Meltdown of 2008-09.
Will the “synchronized global recovery” continue as interest rates rise and central bank assets purchases decline? Policy makers and economists evince confidence as they collectively hold their breath–is the recovery now self-sustaining?
2018 is the first test year. Global assets–stocks, bonds and real estate–remain at levels that are grossly overvalued by traditional measures, and most economies are still expanding modestly. But since the other major central banks have only recently begun to “taper” / reduce their securities purchases, the real test has yet to begin.
The pulses of asset valuations and productive expansion are weakening. Asset valuations are either no longer expanding or are actively falling; markets everywhere feel heavy, as if all they need is one good shove to slip into major declines.
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