Submitted by Taps Coogan on the 3rd of October 2018 to The Sounding Line.
The first couple of years following the Great Recession proved very formative in establishing the dominant market psychology that would persist throughout much of the current economic cycle. Those early years were marked by never-before-seen monetary stimulus from central banks who pledged to do everything and buy anything to reflate the asset bubbles that had burst. Those policies were met by snarky critiques from a slew of traders and bloggers who remarked that ‘you can’t fix a debt crisis with more debt’ and that ‘you can’t print your way to prosperity.’ Talking Bears and ‘The Bernanke’ explained the futility of trying to manipulate markets and of printing money. Nonetheless, asset prices marched higher. It was all part of the ‘New Normal.‘
While many distrusted an economic recovery built on monetary wizardry, there used to be a prevalent and useful resignation to the inevitability of asset price levitation. When its slogan was BTFD (language warning) and eventually BTFATH, websites like Zero Hedge had the pulse of the market, albeit cynically, and provided a useful framework within which to engage in a market that was likely to keep marching higher, regardless of the fundamentals.
When the Federal Reserve began to tighten monetary policy excruciatingly slowly in 2014, much of the snarky resignation to climbing asset prices turned into outright bearishness. After all, if the recovery was built on easy money, shouldn’t its removal signal the end of the recovery? The critics abandoned BTFD in favor of an endless cycle of doom and gloom that continues to this day.
Yet, as Rick Santelli once famously said: “all monetary stimulus is fungible,” and he was right. What critics missed was that while the Fed was tightening, the ECB and the BOJ were keeping interest rates at record negative levels and were still printing hundreds of billions of dollars a year. Meanwhile, the US economic recovery got on sounder footing thanks to tax cuts and a broad campaign of deregulation. While fewer were willing to say it, BTFD was still the only show in town.
Fast forward to today and the ECB and the BOJ are finally signalling a desire to tightening their monetary policy. The sum of global central bank balance sheets is expected to begin shrinking by the end of the year. As such, BTFD finally seems to ring hollow. Its raison d’etre, fungible central bank stimulus, is finally receding at a global level.
And yet US markets keep marching higher (though only US markets), seemingly oblivious to all the growing problems in the world, just as they have been for the past decade. Perhaps that is the power of even a modest dose of structural economic reform. Perhaps it is capital flight to the US and the last vestiges of ECB and BOJ stimulus. The one thing that is clear is that today’s diverging markets do not resemble the BTFD world of just a year ago.
A new market psychology is needed.
For all the discussion about the wealth divide, oceans of debt, and the zombie corporations that QE and ZIRP created, it also undisputedly succeeded in driving up asset prices.
Whenever markets start to get really dicey again, the main thing that central banks will remember about QE is not the wealth divide or other ‘second order’ concerns but the fact that it succeeded in reflating asset bubbles. So while central banks are unlikely to reverse tightening for any run-of-the-mill market ‘dip,’ you can bet at least some of them will dust off the printing presses for a bone-afide market panic or recession. And while renewed stimulus will come with all sorts of concerning ‘second order’ effects, it will probably succeed again in driving up asset prices. Printing unlimited amounts of money and buying financial assets tends to do that.
So while bad news may finally be bad news again, very bad news may very well be the best news of all for markets. Until very bad news arrives, the market is going to have to fend for itself for the first time in a decade.
Out with BTFD and in with BTFR (Recession), aka ‘be cautious until things get really bad.’
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