We are now eight years on from the global catastrophe of the “Great Recession”, but with the US stock market (SPY, DIA, QQQ) banging up against all time highs and global stock market indices (ACWI) recovering to all time peaks reached twelve months ago, can one assume all is swell the global economy?
Unemployment levels in the US are fast approaching levels pre Recession and in Europe it is finally showing meaningful reduction from the peaks of 2013 a story repeated in many of the worlds largest economies.
The policies to get us here have been a mixture of both traditional and extreme. From the US we’ve had traditional government spending unmet by tax collection together with interest rate cuts, to the extreme with the Central Bank purchasing the government debt with conjured money. Europe has avoided expanding government spending but have gone to the far side of extreme with negative interest rates. Japan is using all of the above and China has gone the way of massive relaxation of lending restrictions to the private sector that comically sloshes around.
If all was well with the world it would be time to stop these policies, and indeed the US stopped magically producing money several months ago and have even had an interest rate increase.
However the information content of the developed world government bond markets (BWX) are signalling something very sinister, most are providing a yield around the current inflation rate or, expectations of no inflation usually caused by coming slow growth or recession. This indicates that we are again in the era of potential policy mistakes.
In an appraisal of the policies that have already been installed, US government debt relatively reaching WWII leaves very little room for further support unless in desire of a centrally planned economy. The EU have been late to the party on cutting interest rates and conjuring money but should be applauded for government austerity in the face of a reducing tax base. Japan has morphed into a basket case but China continues to grow at an envious rate for the time being. Unfortunately negative interest rates for retail and corporate banks have not made them lend more but punished pension plans, mainly due to increased financial regulation.
Even more comical than which quarterly bubble private lending is funding in China, is that they have embarked on empowering the private sector, where as the US is empowering the government and the previously failed establishment. It is in fact a shame that the US information technology revolution of the last forty years have passed their rulers and central bankers by. Today “community” platforms (LC, TREE) are enabling borrowing from highest quality risk takers, to increase productivity and create growth, with enviable interest rates and data collection to the lender. Central bankers, however, continue to support their former work alumni and ignore calling for mandates to fund “community” platforms.
In support of the old school at the US Federal Reserve, they correctly watched the stock market or as they call it “data” to help determine when to make their first interest rate rise, but now is the time to start waiting for yields in their unsupported bond market (TLT) to recover. Although employment is at high levels, US central bankers can be relaxed with their inflation mandate, as corporate profitability is very tight, lay-offs are preferable to reduced margins.
There is little room for error but a policy mistake can take us back to the last decade including a stock-market crash.