Taps Coogan – March 22nd, 2021

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David Roche, Independent Strategy President, recently spoke with CNBC to warn about a looming “two year” bear market for global equity markets. He points to rising inflation from abnormally high growth and “unfinanceable budget deficits” which will crimp emerging market access to external capital. He also notes that we are reaching the point where more stimulus is actually a bad thing that creates “unsustainable imbalances in government financing.”

David Roche:

“I think we have unfinanceable budget deficits in pretty well all the major economies in the world but the US is the one where it is most likely to effect yields more than other places… As you open up… people are going to spend all those savings they put aside as precautionary savings during Covid because they didn’t know where the world was going. That comes into the market. In addition you have these huge stimulus packages from governments and central banks. Take the US alone. You’re looking at an additional 8%-9% of GDP plus an additional $2 trillion of infrastructure spread over time. So you’re asking an economy that is highly mature to grow at a rate of 6%-8%. That’s like asking an octogenarian to jive. It may be… a sympathetic idea but it’s rather unseemly. The result of that will be stress… It means… you do get inflation because you are growing above the sustainable rate and as a result of that you get higher yields and that is not a good result for emerging markets…”

“(Emerging Markets) need funding and that’s going to be increasingly difficult in a world where bond yields are going to really continue to go up. Now, why is it a two year bear market? It’s very simple. It’s because we’ve reached a tipping point on policy and I think markets will very soon see that more stimulus is actually a bad thing. It creates unsustainable imbalances in government financing and unsustainable balance sheets for central banks. So, the tipping point on policy is what actually means that the government, and the administrations and the central banks do not have the tools to fight a bear market when it happens.”

I couldn’t agree more that “markets will very soon see that more stimulus is actually a bad thing.” Whether that applies to all markets or just credit & credit-dependent markets largely depends on how policy makers react to inflation. 

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