- Central planners in advanced economies have enabled a situation where double-digit return bull markets in risk assets are needed to keep the financial system from melting down under the weight of excessive (and growing) debt.
- Americans are saving the smallest portion of their incomes since 2008.
- This is due to two reasons: First, the cost of housing, healthcare, education, and services have likely eaten away real wage gains to a greater extent than suggested by the often understated official inflation indexes. Stated otherwise, real wages for the bottom 80% might be lower than standard economic data suggests. Second, risk appetite has increased due to falling unemployment. Individuals who do not fear prolonged periods of unemployment are less likely to boost emergency savings to protect against several months of no wage income.
- If asset prices were to take a dive, servicing debt would become increasingly difficult for overleveraged borrowers as liabilities become oversized relative to assets. Stretched borrowers would no longer be able to sell profitable holdings to pay down debt and lending conditions would tighten as financial health metrics deteriorate.
- Central planners are well aware of the elevated asset price dependency and the consequences of reversing it. They will continue to support financial assets because they have trapped themselves in a corner. Fed credibility and even its independence will be destroyed if another asset bubble of its making bursts. The costs are simply too high. Assets need to remain elevated.
Bottom line: rising asset prices are the first line of defense preventing the type of broad-based consumer deleveraging that causes economic contractions. The US economy is increasingly dependent upon continually rising asset prices for consumers to make debt payments and keep the borrowing and lending tap flowing. Central banks have simultaneously strengthened the global economy and made it more fragile with their ultra accommodative monetary policies.
The “central bank put” safety net for asset prices will remain in place because it is too late to do otherwise. Therefore, selling risk assets short will remain the equivalent of pushing an inflated basketball under water. We reiterate our call to accumulate equity index longs on any dips and trim position sizes on rallies until core PCE convincingly rises above 2%.