During my deliberation, when I met my Macro Economics Prof John Huizinga from University of Chicago Booth in a networking event in Singapore in 2014, he made a very significant statement
“We have borrowed future growth rate with QE”. Very deep and germane for the market today.
Today markets are groping for economic confidence which is nowhere to be seen even from the mountains of Himalayas. One of the most respected global investors who I follow for my economic thoughts in today’s market: Stanley Druckenmiller—Chairman/CEO Duquesne Family office and visiting fellow in economics at Stanford University’s Hoover Institution wrote an article in Wall Street Journal on Dec 16-2018, he shared
“Central bank should pause its double barrelled blitz of higher interest rates and tighter liquidity. This is a time of choosing. We believe the US economy can sustain strong performance next year, but it can ill afford a major policy error, either from the FED or the rest of the administration”.
FED AND ITS POLICY ERROR—-MISLEADING THE MARKET AND INVESTORS.
FED Chair Powell is in quandary at the moment. It has been behind the curve in the last 16 years and living in delusion of grandeur. On June 28-2017, Ex FED Chair Janet Yellen giving interview to Fox Business said: We will not see financial crisis in our life time.
She got it all wrong. The cognitive dissonance her statement was absolutely breathe taking. Then she missed out on many variables and lost her credibility long time back. The main issue with US central bank is that the economic and predictive models are not helping the FED. These models are banal in delivering economic outcomes effectively. FED needs to focus more on realized economic and financial data in order to fathom the macro-economic fundamentals better.
According to Economist magazine last month issue dated Dec 15-21/18:
Powell needs a new strategy to stay ahead of the market. The fiscal stimulus from President Trump tax cuts, which rescued the American economy from economic meltdown, will soon begin to subside. Trade war is sapping confidence and consumers are feeling a sense of despondency.
S&P 500 Index has fallen by almost 10% in a little over two months as growth expectations have ebbed. The difference between yields on short term and ten years bonds, which typically turns negative before recession, has fallen close to zero, giving sleepless nights to investors.
POWELL DOCTRINE IS NOT WORKING: MARKETS ARE GROPING FOR CONFIDENCE IN 2019.
POWELL IS PERPLEXED ABOUT THE MARKETS. He does not really fathom the financial markets chemistry and their outlook. He is grappling with market complex behaviour and movements. The markets are in a mood and moving like a drunken sailor. We can foresee vicious rallies in 2019. Many investors will get squeezed out of shorts. We can foresee amount of $23-25 trillion value being wiped off the equity and bond markets in the next 10-12 months. Wild rallies in the equity markets are becoming the new norm and investors have to live with them. FED is running out of the policy instruments and levers to stimulate growth. Markets are getting out of Powell’s hand. Time for market dictation is gone.
CENTRAL BANKS ARE UNDER THE SPOTLIGHT —-TO DELIVER ECONOMIC OUTCOMES.
Central banks have taken sole responsibility in delivering outcomes. But they have faced many challenges in terms of economic and financial headwinds. Investors are looking at 4 central banks very closely. Big 4 central banks [ FED / ECB / BOJ / BoE] would create global crisis and turmoil in the financial markets with unorthodox policies. Global central banks tried to borrow future growth by QE/ Balance-sheet accommodation and monetary expansion in the last 11 years. But they have failed miserably to spur growth in their economies.
Quantitative easing, policy levers, experiments, helicopter money, operation twist and monetary expansion have not bolster growth outlook. Big 4 central banks have zero monetary tools to save their economies which lack macro fundamentals. Economic Bloodbath will happen in
Europe / USA / UK / South America.
Few red flags for the global economy
- Oil prices
- Technological supremacy
- Industrial espionage
- Geo political risk.
GLOBAL PLAYERS TALK. —–ASSET PRICE DEFLATION IS POSSIBLE.
Some of the top players in the global financial markets have shared their thoughts on various media and expressed their views about equity markets, Brexit and bond market including
Pacific Investment Management Co., [PIMCO], Group chief investment officer
- Beware of rising volatility, widening credit spreads and a flattening yield curve that are indicating an economic downturn within 12 to 24 months.
- Increase cash positions now to await opportunities, such as wider spreads and overshooting to the downside in corporate debt. Potential opportunities are found in U.K. financials, after valuations sank amid fears about a chaotic Brexit, which PIMCO believes is a low-probability event.
- We are beginning to see a few select opportunities around credit, but we remain concerned about credit in general.
BlackRock Inc., Global chief investment strategist
- In equities, we like quality: cash flow, sustainable growth and clean balance sheets. The U.S. is a favored region, and we see emerging market equities offering improved compensation for risk. In fixed income, we add U.S. government debt as ballast against late-cycle risk-off events. We prefer short- to medium-term maturities.
- In a total portfolio context, steer away from areas with limited upside but hefty downside risk, such as European stocks.
- We see a slowdown in global growth and corporate earnings in 2019 with the U.S. economy entering a late-cycle phase.
MARKET INTELLIGENCE REPORT FOR 2019: BE PREPARED FOR FINANCIAL BAZOOKA.
It would be one of the toughest years for the global economy where mettle of many investors/ policymakers / government comes under scrutiny from the global investors. In my opinion, a sub- par economic growth is coming to the market and looks inevitable. Either we will witness slow growth or zero growth in many economies. There are two key historical risk factors — inflationary overheating and asset market distortion — are showing their heads. Mark to market is going down by 40-50%in 2019 and can bring some discipline / stability to the global equity markets to be traded at fair value. Tempestuous times ahead. You are warned. Full stop