The Market’s Day of Reckoning Looms
The comments below are an edited and abridged synopsis of an article by Sven Heinrich
Global easing by the Fed and other central banks means that—again—giant inflows of artificial liquidity are dominating the price action in markets irrespective of earnings or growth. The stock market is not the economy; the economy is not the stock market. The stock market is liquidity and the main tool with which central banks want to control the economy.
Things changed in October when the Fed announced its ‘not QE’ program, which is, in fact, QE.
Growth remains subservient to debt expansion, as debt keeps growing faster than the economy. GDP has increased by $7 trillion since 2007, but public debt has increased by $14 trillion. Corporate debt is twice as high as in 2007, and now we’re back to trillion-dollar deficits with no end in sight other than the curve steepening for years to come.
The bottom 90% is on the hook for all that debt. The top 10% reap the benefits of this monetary-policy-enabled debt expansion, while the bottom 90% get to foot the bill. And people wonder why there’s so much populist discontentment with unemployment at 3.6%. It’s no accident that so many billionaires are worried about political backlash.
The Fed has cut rates three times this year and has rapidly expanded its balance sheet to more than $280 billion since September, and wealth inequality has been made greater again.
Aware that this debt expansion is unsustainable, Fed Chair Jay Powell referred to the day of reckoning while hoping to maintain confidence: “We have such strengths, and I think possibly the day of reckoning could be quite far off.”
Powell knows the day of reckoning is coming. He’s trying to prevent it but is contributing to its prerequisite conditions by enabling ever more debt expansion above economic growth and exacerbating wealth inequality in the process, the same wealth inequality that is driving political discontent across the globe.
Markets are at a critical juncture: A massive melt-up or a reversion of size loom, with no policy leadership to address the underlying causes and issues. We are subject to hapless institutional leaderships eager to advance the contributing factors that will bring about the very reckoning they do nothing to prevent.