Liquidity injections and zero interest rate policies disguise risk and may give a false sense of security…
This risk could not be more evident today. Not only have we seen large downgrades to consensus growth estimates and central banks’ expectations of GDP and inflation, leading indicators also point to a much weaker economy ahead.
There are similarities with 2008 that we should not ignore.
A massive China stimulus inflates risky assets and commodities.
Poor macro and earnings data is ignored by markets assuming that all will improve in the second half of the year.
Yield curves invert. 15 economies now have 30-year yields lower than LIBOR overnight rates.
The figure of negative yield debt rises to $11 trillion.
Financial repression is at all-time highs while leading indicators point to a growing risk of recession.
In the first quarter of 2019, stocks have added $9.3 trillion in market capitalization, bonds have gained almost $2 trillion in value. Meanwhile, the Conference Board Index of leading indicators has plummeted for the major economies. The Citi Economic Surprise Index has also fallen, particularly in March, despite a small bounce in the Eurozone at the beginning of the year. Global trade growth, machine equipment orders and manufacturing indices remain poor… while debt soars to another record-high of $244 trillion according to the Bank of International Settlements and the IIF.
The difference with the Asian or the 2008 crisis is that this time the excess risk is hidden under central banks’ balance sheets and will continue to do so.
So, if risk is hidden under a perennial money supply-growth carpet, why should we worry? Because the endgame is not likely to be a 2008-style bang, but a slow, painful and unstoppable zombification of the global economy. As the evidence of stagnation rises, governments get more nervous. What do they do? Stop the monetary madness? Allow high productivity sectors to thrive? Promote deleveraging and prudent investment? No. More white elephants, massive unproductive spending at the expense of taxpayers and savers in what is likely to be yet another massive transfer of wealth from salaries and savers to governments with fancy names.