How Do You Know The Asset Rally is Fake?

As a very observant market watcher, I have seen all asset markets rally since the beginning of the year.  Was the big break in January that ended on February 11 the bottom?

I don’t know. You go broke picking tops and bottoms and I have no interest in being broke.

Here is what I do know.  Every single central bank in the world is printing money like crazy.  Europe has negative interest rates.  Japan is using monetary policy that you read about in science fiction novels.  China is in trouble.  Brazil is a shit show.  In the US, we raised rates .25, but our FedSpeak is very dovish when it comes to monetary policy.

Check out these series of emails from ZeroHedge.

Do I think it’s a conspiracy?  No.  I do think that central bankers are practicing the wrong form of economics.  Their path is Keynesian.  Keynesians don’t believe in free markets.  They believe markets are more like puppets.  Pull this string and watch it jump.  Over at blogs like Economics One and The Grumpy Economist they have taken the central bankers to task.

For traders, you either have to go with the flow or stop trading.

In the emails, they despondent trader cites big crazy volume.  Numbers that they haven’t seen before.  Are new participants suddenly discovering the virtues of Soybean trading?

No.

Is it the fault of electronic trading?

Partly.  But it’s not sinister.  Electronic trading can push more trades through the system than humans can.  It’s the same as factories that are automated versus 100%  human.  Automated factories produce more.

Here is the thing.  If the central bankers are right, we’d see all this financial engineering result in higher GDP.  But, the real outcome is the 1% are seeing an economy that gives them 5% GDP growth while the rest of the world is experiencing and economy that is dragging along at around 1% growth.  I went to Ycharts and made this pretty chart.  No one has a ragingly bullish GDP.
US Real GDP Growth Chart

US Real GDP Growth data by YCharts

If the central bank policy were working, we would see real GDP growth. Bernie Sanders and Donald Trump’s rhetoric wouldn’t have the hold on the American public that they do.

To be clear, I am not a Keynesian. I find the analysis that many of the Keynesians to publish almost juvenile at this point. Clearly, I have confirmation bias. So, I decided to check in with my good friend Yra Harris.

Yra lead off one of his latest blogposts this way:

The world has left the economic realm and is now heading into the political, which the Fed’s models cannot weigh because politics are too far complex and cannot be explained by six variables of a perfect free market system.

Yra is absolutely right.

Going off the rails economically has massive consequences for all asset classes. If you are a startup, pay close attention because bad central bank policy affects you too. It affects your customer base. It affects your ability to recruit. It affects your ability to continue to fund operations.

How can it end with a rainbow instead of a descent into financial hell? GDP can grow. But, in order to do that we would need to see world government assemblies check the power at their central banks and pass fiscal policies that encourage growth. John Cochrane shines a beacon of light on the path forward right here.

Will it happen?

  • Do you read Miles Kimball? He too believes in monetary policy, in this case negative interest rates. I think they’d be fine, helping some; and a heli-drop of printed money would be even better.

    But I claim the main issue is NOT monetary, nor actually quite fiscal except that taxes are too high and gov’t spending has low or negative ROI.

    Too much regulation, too difficult to start a business, and too many taxes.