Submitted by Taps Coogan on the 5th of July 2019 to The Sounding Line.
Enjoy The Sounding Line? Click here to subscribe.
It is no secret that the phrase ‘bad news is good news’ has become a very real phenomenon for financial markets. Both stock and bond markets have moved to record high valuations in recent weeks amid aggressive corporate earnings downgrades and global economic data that looks increasingly weak.
The truth is that, so long as central banks continue to view their mission to be to permanently prevent slowdowns and so long as they continue to view financial markets as their primary tool for doing so, economic fundamentals only really matter to markets to the extent that they matter to central banks. The result is that ‘bad news’ becomes ‘good news.’
If we accept this, a tricky question arises: Is good news therefore bad news? If stocks go up because a slowdown is looming, if that slowdown doesn’t materialize, and central banks don’t need to deliver the stimulus, will stocks go down? Could the lack of a slowdown therefore cause a slowdown? If the lack of a slowdown causes a slowdown, wouldn’t that slowdown lead to exactly the kind of stimulus that was desired in the first place? If so, why would the slowdown occur at all? If not, does the Fed even need to provide stimulus?
Perhaps a simpler way to think of the entire dynamic is that central banks are guaranteeing markets a bailout. When you have a bailout guarantee, all news is either good news or unimportant. Either you don’t need a bailout because everything is fine, or you get a bailout and, after some turbulence, everything is fine.
The key for financial markets is not whether the economic data is good or bad. The key is whether or not central banks continue to proactively guarantee the continuation of this financial market led economic expansion. If markets begin to question the central banks’ commitment or ability to sustain the expansion, run for the hills. Sooner or later, that seems inevitable. Until then, there is no such thing as bad news. After all, what do you do when you have a bailout guarantee from an entity that can literally print unlimited amounts of money and which views the appreciation of the assets that you hold as the only way to sustain the economy?
Would you like to be notified when we publish a new article on The Sounding Line? Click here to subscribe for free.