by Adam Taggart, Peak Prosperity:
The prospects for the rest of the year are awful
Après moi, le déluge
~ King Louis XV of France
A hard rain’s a-gonna fall
~ Bob Dylan (the first)
As the Federal Reserve kicked off its second round of quantitative easing in the aftermath of the Great Financial Crisis, hedge fund manager David Tepper predicted that nearly all assets would rise tremendously in response.
“The Fed just announced: We want economic growth, and we don’t care if there’s inflation… have they ever said that before?”
He then famously uttered the line “You gotta love a put”, referring to the Fed’s declared willingness to print $trillions to backstop the economy and financial makets.
Nine years later we see that Tepper was right, likely even more so than he realized at the time.
The other world central banks followed the Fed’s lead. Mario Draghi of the ECB declared a similar “whatever it takes” policy and has printed nearly $3.5 trillion in just the past three years alone. The Bank of Japan has intervened so much that it now owns over 40% of its country’s entire bond market. And no central bank has printed more than the People’s Bank of China.
It has been an unprecedented forcefeeding of stimulus into the global system. And, contrary to what most people realize, it hasn’t diminished over the years since the Great Recession. In fact, the most recent wave from 2015-2018 has seen the highest amount of injected ‘thin-air’ money ever:
In response, equities have long since rocketed past their pre-crisis highs, bonds continued rising as interest rates stayed at historic lows, and many real estate markets are now back in bubble territory. As Tepper predicted, financial and other risk assets have shot the moon.
And everyone learned to love the ‘Fed put’ and stop worrying.
But as King Louis XV and Bob Dylan both warned us, what’s coming next will change everything.
The Deluge Approaches
This halcyon era of ever-higher prices and consequence-free backstopping by the central banks is ending.
The central banks, desperate to give themselves some slack (any slack!) to maneuver when the next recession arrives, have publicly committed to ‘tightening monetary policy’ and ‘unwinding their balance sheets’, which is wonk-speak for ‘reversing what they’ve done’ over the past decade.
Most general investors today just don’t appreciate how gargantuanly significant this is. For the past 9 years, we’ve become accustomed to a volatily-free one-way trip higher in asset prices. It’s been all-glory with no risk while the ‘Fed put’ has had our backs (along with the ‘EBC put’, the ‘BOJ’ put, the ‘PBoC put’, etc). Anybody going long, buying the (few, minor) dips along the way, has felt like a genius.
That’s all over.
Based on current guidance from the central banks, “global QE” is expected to drop precipitously from here:
With just the relatively tiny amount of QE tapering so far, 2018 has already seen more market price volatility than any year since 2009. But we’ve seen nothing so far compared to the volatility that’s coming later this year when QE starts declining in earnest.
In parallel with this tightening, global interest rates are rising after years of flatlining at all-time lows. And it’s important to note that our recent 0% (or negative) yields came at the end of a 35-year secular cycle of declining interest rates that began in the early 1980s.
Are we seeing a secular cycle turn now that rates are creeping back up? Will rising interest rates be the norm for the foreseable future?