The Great Dichotomy: Global Economy at the Precipice; in Panic, Central Banks Flood World with Liquidity, Global Stocks Soar!

The Great Dichotomy: Global Economy at the Precipice; in Panic, Central Banks Flood World with Liquidity, Global Stocks Soar!

We are at a threshold of something unseen in history. Aside from negative policy rates, the record volume of negative-yielding securities, previously inverted yield curves, record repos, central bank balance sheets, and many more, the great dichotomy has been the record-setting global stock markets in the face of a sharply decelerating global economy.

 

If you haven’t been tuned in, inspired by the recent melt-up of US equity markets, the MSCI World Index hit an all-time high last week.

In the US, the participation rate hasn’t been 100% for the major benchmarks. While the NYSE Composite (NYA) is at its record resistance, the Dow Jones Transportation Average (TRAN), the small scale Russell 2000 (RUT) and its counterpart the S&P 600 (SML), and the mid-cap S&P 600 (MID) remains distant from their previous respective apexes.

Meanwhile, developed markets have outperformed as MSCI Asia, emerging markets and the UK have lagged. (Yardeni.com)

What’s striking has been the path deviation between the path between stock prices and the real economy as shown by the Global ISM index.

 

And stocks are soaring despite OECD’s leading indicators and world trade activities have been flashing red!

 

Interestingly, even the S&P 500 seems to have deviated ridiculously from its fundamentals: falling revenue growth and contracting income that has reflected on the general corporate profits after tax (excluding inventory valuation adjustments and Corporate Consumption adjustments). The aberration has spread to even Perma-bull Ed Yardeni’s favorite boom-bust indicator (CRB Raw Industrial prices divided by initial unemployment claims)!

And along with the ongoing strains in the repo market, which has prompted the US Federal Reserve to reactivate its $60 billion (not QE) T-bill purchases, global central banks have embarked on a joint campaign to ease by cutting rates: (from Charlie Bilello) Rate Cuts in 2019... Fed: -75 bps ECB: -10 bps Denmark: -10 bps Australia: -75 bps Brazil: -150 bps Russia: -125 bps India: -135 bps China: -16 bps Korea: -50 bps Mexico: -75 bps Indonesia: -100 bps Philippines: -75 bps Thailand: -50 bps Chile: -100 bps Turkey: -1000 bps

As such, the Fed’s balance sheet has spiked, which helped stoke its money supply growth.

 

Over half of the global central banks have eased. The FED’s $ 286 billion balance sheet expansion (as of November 13) surely fired up the S&P 500.

And the easing measures undertaken by global central banks have had divergent effects; liquidity in developed markets have bounced while emerging markets have yet to respond.

Nonetheless, the global money supply has been ramped along with the MSCI world index, even as the soft indicator, the economic surprise index continues to tumble!

In spite of these collaborative measures by activist central banks to prevent a downturn, the astonishing escalating deviation between financial assets and the real economy should highlight the speculative blowoff phase of the current market cycle.

 

Higher asset prices, it is held, generates liquidity that may push exposing imbalances down the road. However, with global debt rocketing to top $255 trillion, credit markets haven’t been as convinced as the stock markets that flooding the world with liquidity would suffice.

However, US Junk bond’s widening spreads seem to signal growing investor aversion towards risky credit.

Instead, such distinction reveals the extent of the erosion of real savings with the continuing buildup of excess capacity, debt saturation, expanding Ponzi finance or zombie companies, the conspicuous lack of investments, and the excessive fixation on chasing yields as symptoms.

Diminishing returns from the sweet spot from such joint interventions by central banks would arrive earlier than most expect, trade war or not.

S&P 500 and Global Equities: Behind The Best 71-Day Returns Since 1987; China’s Credit Rockets! Continued Ascent of US Primary Dealer Holdings of T-Bills

A delirious stock-exchange speculation such as the one that went crash in 1929 is a pyramid of that character. Its stones are avarice, mass-delusion and mania; its tokens are bits of printed paper representing fragments and fictions of title to things both real and unreal, including title to profits that have not yet been earned and never will be. All imponderable. An ephemeral, whirling, upside-down pyramid, doomed in its own velocity. Yet it devours credit in an uncontrollable manner, more and more to the very end; credit feeds its velocity—Garet Garett

S&P 500 and Global Equities: Behind The Best 71-Day Returns Since 1987; China’s Credit Rockets! Continued Ascent of US Primary Dealer Holdings of T-Bills

Figure1

This first chart shows that the S&P 500 has registered the fourth-best return in 71 days and the best return since 1987. (chart courtesy of Charlie Bilello)

But here’s the rub. Beneath the surface, of the top four best returns in 71-days, namely, 1975, 1930, 1987 and 1943, yearend returns were either strikingly single digit or stunningly negative.

Said differently, by the close of the year, the gains of the top four were completely or mostly reversed.

The possible reasons:

-1975 signified the tail end of 1973-1975 recession.

-1930 represented the onset of the Great Depression

-1987 saw the horrific Black Monday crash and

-1943 may have been the prelude to the post World War 2 the short recession of 1945.

Will the SPX follow the same path?

Figure 2

The next chart (also from Charlie Bilello) shows the intensifying euphoria that has engulfed global equity markets.

Forty-six of the forty-eight national ETFs including the Philippines have posted positive returns! The average returns have been an astounding 12%, the best start since 1987! (returns in USD)

1987 again!

Will global equity markets share the same fate of the SPX?

The third chart comes from Ed Yardeni’s Country Briefing: China

It shows how the Chinese government has panicked to have incited the unleashing a tsunami of credit at a scale never seen before!

Figure 3

The perspicacious Doug Noland with the nitty gritty:

China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 billion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 TN annualized). This was 55% above estimates and a full 80% ahead of March 2018. A big March placed Q1 growth of Aggregate Financing at $1.224 TN – surely the strongest three-month Credit expansion in history. First quarter growth in Aggregate Financing was 40% above that from Q1 2018. 

Over the past year, China's Aggregate Financing expanded $3.224 TN, the strongest y-o-y growth since December 2017. According to Bloomberg, the 10.7% growth rate (to $31.11 TN) for Aggregate Financing was the strongest since August 2018. The PBOC announced that Total Financial Institution (banks, brokers and insurance companies) assets ended 2018 at $43.8 TN.

March New (Financial Institution) Loans increased $254 billion, 35% above estimates. Growth for the month was 52% larger than the amount of loans extended in March 2018. For the first quarter, New Loans expanded a record $867 billion, about 20% ahead of Q1 2018, with six-month growth running 23% above the comparable year ago level. New Loans expanded 13.7% over the past year, the strongest y-o-y growth since June 2016. New Loans grew 28.2% over two years and 90% over five years. 

China’s consumer lending boom runs unabated. Consumer Loans expanded $133 billion during March, a 55% increase compared to March 2018 lending. This put six-month growth in Consumer Loans at $521 billion. Consumer Loans expanded 17.6% over the past year, 41% in two years, 76% in three years and 139% in five years. 

China’s M2 Money Supply expanded at an 8.6% pace during March, compared to estimates of 8.2% and up from February’s 8.0%. It was the strongest pace of M2 growth since February 2018’s 8.8%. 

South China Morning Post headline: “China Issues Record New Loans in the First Quarter of 2019 as Beijing Battles Slowing Economy Amid Trade War.” Faltering markets and slowing growth put China at a competitive disadvantage in last year’s U.S. trade negotiations. With the Shanghai Composite up 28% in early-2019 and economic growth seemingly stabilized, Chinese officials are in a stronger position to hammer out a deal. But at what cost to financial and economic stability?

Beijing has become the poster child for Stop and Go stimulus measures. China employed massive stimulus measures a decade ago to counteract the effects of the global crisis. Officials have employed various measures over the years to restrain Credit and speculative excess, while attempting to suppress inflating apartment and real estate Bubbles. Timid tightening measures were unsuccessful - and the Bubble rages on. When China’s currency and markets faltered in late-2015/early-2016, Beijing backed away from tightening measures and was again compelled to aggressively engage the accelerator. 

Credit boomed, “shadow banking” turned manic, China’s apartment Bubble gathered further momentum and the economy overheated. Aggregate Financing expanded $3.35 TN during 2017, followed by an at the time record month ($460bn) in January 2018. Beijing then finally moved decisively to rein in “shadow banking” and restrain Credit growth more generally. Credit growth slowed somewhat during 2018, as the clampdown on “shadow” lending hit small and medium-sized businesses. Bank lending accelerated later in the year, a boom notable for rapid growth in Consumer lending (largely financing apartment purchases). And, as noted above, Credit growth surged by a record amount during 2019’s first quarter. 

China now has the largest banking system in the world and by far the greatest Credit expansion. The Fed’s dovish U-turn – along with a more dovish global central bank community - get Credit for resuscitating global markets. Don’t, however, underestimate the impact of booming Chinese Credit on global financial markets. The emerging markets recovery, in particular, is an upshot of the Chinese Credit surge. Booming Credit is viewed as ensuring another year of at least 6.0% Chinese GDP expansion, growth that reverberates throughout EM and the global economy more generally.

So, has Beijing made the decision to embrace Credit and financial excess in the name of sustaining Chinese growth and global influence? No more Stop, only Go? Will they now look the other way from record lending, highly speculative markets and reenergized housing Bubbles? Has the priority shifted to a global financial and economic arms race against its increasingly antagonistic U.S. rival? 

Chinese officials surely recognize many of the risks associated with financial excess and asset Bubbles. I would not bet on the conclusion of Stop and Go. And don’t be surprised if Beijing begins the process of letting up on the accelerator, with perhaps more dramatic restraining efforts commencing after a trade deal is consummated. Has the PBOC already initiated the process?

April 12 – Bloomberg (Livia Yap): “The People’s Bank of China refrained from injecting cash into the financial system for a 17th consecutive day, the longest stretch this year. China’s overnight repurchase rate is on track for the biggest weekly advance in more than five years amid tight liquidity conditions.”

Figure 4

US primary dealer holdings of T-Bills and Floating Rate Notes have been spiraling upwards. Why? Have they been accumulating USTs for their account or on behalf of clients? Have these intensifying accumulation been about the growing scarcity of risk-free collateral?

Four different charts that are related (see Garet Garrett excerpt)

The year of the pig.

Bitcoin’s Fear Of Missing Out Trade Grips the World! Blockchain Technology is the Future

My thoughts on bitcoin years ago…

The information age will provide alternatives not only to capital markets (e.g. P2P Lending and Crowd Funding) but to money as well.

Bitcoin or not, the incumbent political system’s sustained policies of debasement will only accelerate and intensify the search for currency alternatives premised on the burgeoning forces of “decentralization”.

ECB Says Bitcoin’s Origin is from the Austrian School November 13, 2012

I’d add that if bitcoin is a manifestation of declining trust on the US dollar standard or even fiat money, then bitcoin will flourish not only in Asia but around the world despite sustained harassment by governments.

Bitcoin’s Future is in Asia and More November 20, 2013

I would add that bitcoin’s evolution has also been a function, not only of as a cross between fiat money and commodity money, but also of the technology adaption lifecycle or technology diffusion via the S-curve.

Matthew Ridley: Bitcoin as Synthetic Money April 20, 2013

Sadly, as a non-IT geek, I had no confidence in opening bitcoin wallet for fear of being hacked. Thus I wasn’t able to participate in the current mania.

Nevertheless, opportunities abound.

The blockchain technology from which bitcoin operates from would most likely revolutionize many aspects of modern day commerce. As an example, through radical decentralization of the share markets, stock exchanges would be compelled to adapt or die. Share exchanges would be channeled through nodes via the Peer to Peer (P2P) platform which eliminates the need for settlement, depositories and transfer agents.

The first stock exchange to embrace the blockchain technology is the Australian Security Exchange.

The pioneer company to issue and have its shares traded on the bitcoin-blockchain platform is Online retailer Overstock.com.

The short of it, the blockchain technology, through its many potential applications, is the future. Bitcoin is a testament to this. And the blockchain technology will be fused with many other evolving technology breakthroughs as Artificial Intelligence, Machine Learning, Big Data, Quantum Computing, the Internet of Things, Mobile Business and Banking applications and many more.

In as much as the stock exchange would have to evolve, this applies to other appurtenant intermediaries. Yes, my role is about to go the ways of the dinosaur. So I would have to look for alternatives.

Now to the Bitcoin Mania…

The cryptocurrency (digital currency) Bitcoin (BTC) has taken the world by storm!

Bitcoin relentless upside streak has continually carved up astounding feats.

 

Last Friday, Bitcoin prices surged beyond $18,000 (close to $20,000 on the CoinBase exchange)

Bitcoin’s inexorable price surges have elevated its market capitalization to eclipse many of the world’s biggest companies. It briefly surpassed VISA. It has bested PepsiCo, Boeing and McDonald’s. South Korea’s bitcoin prices likewise momentarily exceeded JP Morgan.  

Bitcoin’s market cap has even advanced beyond the nominal GDPs of nations like Pakistan and Ireland!

At $18,000, bitcoin’s year-to-date returns have swelled stunningly to over 1,700%!

In local currency or the peso, one bitcoin is almost equivalent to a brand new sedan!

And many people have done amazing things to join the Bitcoin shindig.

One person has sold everything he owned (business and house) to speculate on Bitcoin. He and his family now reside in a campsite to await for the ‘ultimate cryptoboom’.

And because one IT specialist accidentally threw his hard drive away when Bitcoin prices had been inactive years ago, he has now been digging the landfill to recover his lost 7,500 bitcoins!

Hordes of people have been opening new bitcoin accounts (300K new accounts on November 22 to 26).  Last week, one of the largest bitcoin exchanges buckled from the sheer volume of new accounts which caused energy outages.

Some central banks have taken the bitcoin storm with trepidation. The Indonesian government intends to ban it.  The governments of India and China have warned against Bitcoin. However, if you can’t beat them then join them. 40% of central banks have reported plans of introducing digital currencies by 2019

Bitcoin is the epitome of the Fear Of Missing Out (FOMO) trade.

Fret Not. The FOMO trade is ubiquitous, or almost everywhere.

 

The FOMO trade in the stock market may not be in the same degree in the gains as BTC. Nevertheless, the slope of price actions has resonated.

The FTSE world index has been strikingly up by 19.44% in 2017 while the MSCI Asia Pacific (MXAP) has soared by 25.22%!

Most of the Asian bellwethers have enthralled by the FOMO trade.

 

Mongolia’s MSE and Vietnam’s VSN have been the present leaders. Their price actions have accelerated to boost 2017 returns to a whopping 85.6% and 41.41% respectively!

Many think that BTC has been the star of 2017.

In reality, nominal returns of Venezuela’s Caracas Stock Index have dwarfed Bitcoin’s.  The IBVC has zoomed by a staggering 3,975% this year which is more than twice BTC’s returns! But that’s because Venezuela has been suffering from hyperinflation (CPI of 1,369%)!

In the case of Venezuela, the government prints an avalanche of money, consequently, a run on the currency ensues accompanied by a panic safe-haven bid on stocks which makes it “soar”.

Needless to say, the global risk ON environment puts into the spotlight Bitcoin’s sterling performance.

Like stocks, some cheerleaders say that higher bitcoin prices will engender wealth for society.  Such hokum confuses asset inflation (money) with economic progress (wealth).

Asset inflation merely redistributes a claim on wealth from buyers to sellers. It does not generate societal prosperity. As the great Ludwig von Mises once wrote,

Economic progress in the narrower sense is the work of the savers, who accumulate capital, and of the entrepreneurs, who turn capital to new uses. 

 

While BTC’s transformational technology indeed has merits, the blowoff in the frenzied bidding of BTC’s prices doesn’t justify these.