Combustion
This is all going to end badly, even some ardent bulls will freely admit this, the question is the how, when and the where. Frankly it’s a tragedy that’s unfolding and discerning eyes can see it. Since the December lows markets have taken the scripted route higher salivating at the prospect of dovish central bankers once again levitating asset prices higher. A Pavlovian response learned over the past 10 years. Record buybacks keep flushing through markets and cheap money days are here again as yields have dropped markedly since their peak last fall.
But investors may sooner or later learn the hard way that this sudden capitulation by central bankers is not a positive sign, but rather a sign of desperation.
Fact is central banks are hopelessly trapped:
10 years after the financial crisis is there any conceivable scenario under which central banks will ever normalize balance sheets to pre-crisis levels?
Anyone?
Implications:
1. The Fed stopping here is an admission of failure
2. Full normalization would crash global equities
3. Central banks are trapped & are forced to remain accommodative
4. Central bank policy is still in crisis mode
5. It’s all a propped up shell game
The capitulation is as complete as it is global and 10 years after the financial crisis there is not a single central bank that has an exit plan. As today’s Fed minutes again highlighted: No rate hikes in 2019 while the tech sector is making a new all time human history high this week. What an absurdity. A slowing economy ignored by markets as cheap money once again dominates everything.
So great is the fear of falling markets and a slowing economy that the grand central bank experiment has ended in utter failure. But at least the Fed tried for a little bit before capitulating. The enormity of the central bank failure is perhaps best encapsulated by the state of the ECB under Mario Draghi:
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