Global Macro Backdrop: Absolutely remarkable and historically unprecedented
- Developed market equity indexes are scorching higher across the board. New all-time highs or multi-decade highs are being reached nearly every day in the US, Japan, Germany, and elsewhere.
- Bond yields are constrained across the duration and risk spectrum near multi-decade lows. European sovereign 2-year notes in periphery nations such as Italy, Portugal, and Spain are negative and continuing to hit new lows.
- Bond spreads between Germany and the periphery are generally narrowing to new lows, pricing in similar levels of risk between EU nation states.
- European high yield bonds are trading below 2%.
- Equity, bond, and currency market volatility are all at or near historic lows. This is the least volatile year for US stocks in the history of the stock market.
- US yield curve is flattening with the narrowest 10y-2y and 30y-2yr spreads in a decade. Bond vigilantes are nowhere to be found.
- There are several instances of emerging market stress and turbulence in places such as Turkey, Saudi Arabia, Venezuela, Brazil, South Africa, Egypt, and Ukraine. None of these have led to broader contagion.
- China’s total debt has exceeded 304% to GDP according to the Institute of International Finance. US deficits are expanding briskly and moving toward the $1 trillion level even during a mature economic expansion with ultra-low 4.1% unemployment per the BLS. What will US deficits balloon to when the next economic downturn hits?
- Several commodity markets are sustaining sharp moves higher – such as industrial metals, live cattle, and the energy complex. This will feed into actual inflation, and as usual, to a lesser degree the official inflation indexes.
- Global real estate markets have been increasing at between 2 and 10 times the stated rates of overall official inflation since the GFC. Individuals in major global cities, such as Sydney, Auckland, Singapore, Hong Kong, Toronto, Vancouver, San Francisco, New York, London, and many others continue to pay an increasing portion of personal income on housing. The commercial retail sector has struggled with higher rents during an already sensitive time for brick and mortar businesses. Leveraged investors in real estate assets are compounding their wealth.
- Personal saving rates are plummeting to new decade lows while personal debt is expanding.
Conclusions to Draw
- The world is awash in unprecedented levels of monetary liquidity and debt. Central banks decided that in order to try to repair the economic damage left behind after the financial crisis, they would “do what it takes” to flood markets with newly created cash and suppressed interest rates via “powerful easing.”
- Assist FX research has concluded we are in a period of semi-runaway asset price inflation caused by excessive global central bank money supply. As many of our views are initially, this is clearly a non-consensus call. Most analysts are still subscribing to more traditional views that asset price increases are due to “fundamentals” such as earnings or even tax reform hopes. While partially true, that does not tell the complete story you need to know.
- It will be incredibly difficult for the Fed and other central banks to effectively rein in their asset bubbles without causing explosive waves of sovereign, corporate, and personal debt default contagion events dwarfing those of 2008-2012. That is why Assist FX takes another non-consensus view in expecting central banks to eventually be quasi forced by politicians to “inflate and currency debase the debt away.” Being highly unpopular with the public, these inflationary policies will be sold with highly technical, vague, confusing language and policies generally involving coordination between government treasury departments and central banks funding them directly. We see an underappreciated risk that the next crisis revolves around unsustainable debt levels, spiking bond yields, stagflation, fiat currency destruction, and capital controls.
- While non-consensus among traditional banks and analysts, our view is by no means isolated. Bitcoin is not making parabolic new all-time highs nearly every day because people enthusiastically love computer code or millions of people need a new way to launder their narco cash (which any cryptocurrency developer will tell you is not factual because authorities can trace bitcoin transactions). Trust in the global monetary system and fiat currencies in general is fracturing at the edges. Not at the core, but at the edges.
- Center banks are backed into a corner concerning risk assets and suppressed official inflation indexes. When the inflation readings are showing below target readings, investors perceive they have a free pass bid up asset prices unchecked because most assets (ie. house prices, land, stocks, art, digital currencies) are excluded from what central bankers call “inflation,” leaving them “below target” even if assets grind straight up with virtually no hiccups.
- Reiterating our call from earlier this spring, risk assets remain in melt-up mode. It will take a major catalyst to change this; namely, official inflation indexes will need to rise and stay above target or, a devastating geopolitical event (such as a major war or nuclear attack) even beyond the myriad of existing global stresses would need to occur. Even the latter issue, though tragic on a human level, could prove to be a temporary setback for assets in a world awash in more than 13 trillion dollars and counting of newly created central bank cash.