“If only US GDP growth could remain negative in Q2, what a lot of money we could make”. You could almost hear the excited chatter in financial markets on Friday, as news spread that revised data showed the US economy had seen negative growth in Q1.
This is yet another example of the upside-down world in which we live today. The US Federal Reserve has built up $4tn of debt in its fruitless pursuit of creating a ‘wealth effect’ via rising financial markets. It imagines that somehow this will encourage the ageing US population to rush out and spend in the way that people did when they were younger and their incomes were rising.
This policy has been wishful thinking since it started back in 2009. The fact that Q1 growth has gone negative again only confirms what common sense told us all along. But it has provided a bonanza for those able to take advantage of the Fed’s vast lending programme, as the latest chart of the IeC Boom/Gloom Index shows:
- The US S&P 500 Index has risen 250% since January 2009, from 825 to 2017 (red line)
- 3 month interest rates have fallen from 4.23% at the end of 2007 (before the financial crisis) to just 0.1% today
- And, of course, the Fed now has $4tn of debt on its balance sheet, which someone will have to repay, somehow
The Fed’s theory was simple, as spelt out 4 years ago by then Fed Chairman Ben Bernanke:
“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion”
He also assured us that the Fed’s debt was not something to worry about. It was merely temporary, as the return of economic growth would enable most to be repaid, and the rest would disappear as strong growth created inflation.
Today it is surely clear that this was simply wishful thinking. Q1 economic growth was a negative -0.7%, and April inflation was a negative -0.2%. But financial markets are confident there is no chance of the Fed ever admitting it made a terrible and costly mistake.
Already the idea of an interest rate rise this month has disappeared from the agenda. Instead, they can hope that another vast stimulus programme will soon begin – QE4. What bliss this will be for those who play the markets on borrowed money.
And not only can they hope to be given further amounts of free cash by the Fed. The renewed collapse of the Japanese yen confirms that Abenomics is also failing – so no doubt the Bank of Japan will increase its own free cash programme before too long. Plus, of course, the European Central Bank is already issuing €60bn/month in its new programme.
As the great scientist, Einstein noted, ““a good definition of lunacy is to repeat the same action, and expect different results“. But don’t mention that to the central banks. They are sure that their only problem is that they haven’t done enough stimulus.
No wonder the Boom/Gloom sentiment index (blue column) jumped for joy to a near-record level in May, at the thought of all those new stock market gains to come. After all, the Atlanta Fed’s GDPNow model is already forecasting Q2 GDP growth of just 0.8%.
WEEKLY MARKET ROUND-UP My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 47%. “Exports out of the EU saw a six-fold year-on-year increase due to a weak euro making export business attractive”
Brent crude oil, down 39%
Naphtha Europe, down 36%. “The arbitrage for naphtha remains open from the Mediterranean to Asia this week”
PTA China, down 31%. “Sales in the downstream markets in the key China markets had slowed down, especially as it approaches the traditional lull season in the June-July period”
HDPE US export, down 15%. “Domestic export prices remained stable”
¥:$, down 21%
S&P 500 stock market index, up 8%