For years critics of U.S. central-bank policy have been dismissed as Negative Nellies, but the ugly truth is staring us in the face: Stock-market advances remain a game of artificial liquidity and central-bank jawboning, not organic growth. And now the jig is up.
As Iâve been saying for a long time: There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of central banks. None. Zero. Zilch.
And donât think this is hyperbole on my part. I will, of course, present evidence.
In March 2009 markets bottomed on the expansion of QE1 (quantitative easing, part one), which was introduced following the initial announcement in November 2008. Every major correction since then has been met with major central-bank interventions: QE2, Twist, QE3 and so on.
When market tumbled in 2015 and 2016, global central banks embarked on the largest combined intervention effort in history. The sum: More than $5 trillion between 2016 and 2017, giving us a grand total of over $15 trillion, courtesy of the U.S. Federal Reserve, the European Central Bank and the Bank of Japan:
When did global central-bank balance sheets peak? Early 2018. When did global markets peak? January 2018.
And donât think the Fed was not still active in the jawboning business despite QE3 ending. After all, their official language remained âaccommodativeâ and their interest-rate increase schedule was the slowest in history, cautious and tinkering so as not to upset the markets.
With tax cuts coming into the U.S. economy in early 2018, along with record buybacks, the markets at first ignored the beginning of QT (quantitative tightening), but then it all changed.
And guess what changed? Two things.
In September 2018, for the first time in 10 years, the U.S. central bankâs Federal Open Market Committee (FOMC) removed one little word from its policy stance: âaccommodative.â And the Fed increased its QT program. When did U.S. markets peak? September 2018.
And with the sugar high of the tax cuts fading, it was too much. Add trade wars and global growth slowing, and it was more than markets could handle.
And so, yes, the timing was perfect and you can see it in the chart:
Who ya gonna believe, me or our lying eyes?
Global central banks did the dirty work for the Fed between 2016 and 2017, adding ever more artificial liquidity. But then the ECB slowed its QE program and finally ended it in late 2018.
How did the DAX (German stock index) handle all that removal in artificial liquidity? Not well.
The DAX peaked in January 2018, as the ECB started reducing its QE program.
The Fed likes to claim it is managing policy based on the economy, not on markets. But hereâs the ugly truth on that: The economy these days is very much tied to market performance. Big drops in markets have an adverse impact on the economy, full stop. Hence, it is a fallacy to argue that one looks at one but not the other.
After all, tell me when the Fed ever raises rates during a massive market correction? The answer: Never. Itâs always the other way around.
As soon as markets drop, all plans for rate hikes and/or balance-sheet reductions come to a sudden halt:
The Fed never sees it coming.
Crude was $74+ & $SPX at 2900+ when this chatter came out.
3 months later: let’s stop everything.
It’s almost as if market price trajectory drives Fed policy. ð¤ pic.twitter.com/x4SmsNcSbH
— Sven Henrich (@NorthmanTrader) January 3, 2019
Recognizing the marketâs newfound sensitivity to QT, the Fed was sure to react. After all, markets were sensitive to slowing growth in China, Appleâs
warning this week and the renewed sell-off in markets as a result.
And what did we get Friday morning? The predictable jawbone: â[Fed Chairman Jerome] Powell signals heâs flexible on interest rates.â
âWe donât believe that our issuance is an important part of the story of the market turbulence that began in the fourth quarter of last year. But, Iâll say again, if we reached a different conclusion, we wouldnât hesitate to make a change,â Powell said. âIf we came to the view that the balance sheet normalization plan â or any other aspect of normalization â was part of the problem, we wouldnât hesitate to make a change.â
Nonsense. And he knows that, and he dangled the carrot and thatâs all that mattered.
Who ya gonna believe, me or our lying eyes?
This move came on the heels of Chinaâs overnight intervention announcing a coming cut in its bank reverse ratios by 1%.
So donât mistake this rally for anything but for what it really is: Central banks again coming to the rescue of stressed markets. Their action and words matter in heavily oversold markets.
But the reality remains, artificial liquidity is coming out of these markets:
Although the Fed, as indicated by Powell, may slow or even halt their projected path. On a dime. And thatâs what markets are reacting to today.
Central banks keep claiming all this is done to support growth. What growth? What has actually been accomplished?
All this intervention has not produced sustained accelerating growth, certainly not compared to previous cycles.
Tax-cut sugar high aside, all growth projections for 2019 are pointing to a marked slowing, with recession risks rising.
The only thing that has really grown as a result of all this cheap money and intervention is debt:
Corporate debt has doubled since 2007. Government debt is expanding with no end in sight, having risen by another $2 trillion in the first two years of the Trump administration.
And so here we go again:
And central banks have already begun to react.
Whatâs the larger message here? Free-market price discovery would require a full accounting of market bubbles and the realities of structural problems, which remain unresolved. Central banks exist to prevent the consequences of excess to come to fruition and give license to politicians to avoid addressing structural problems. And by preventing these market forces from playing out at each sign of trouble, the can gets kicked further and further down the road. Each successive recovery keeps the illusion alive, but âaccommodationâ requires ever-lower rates before the monsters return. In the meantime, debt keeps expanding, while each recovery produces less and less organically driven growth, and ever-higher wealth inequality. This is what this system produces.
And thatâs the ugly truth. But you wonât hear it from the Fed.
Sven Henrich is founder and the lead market strategist of NorthmanTrader.com. He has been a frequent contributor to CNBC and MarketWatch, and is well-known for his technical, directional and macro analysis of global equity markets. His Twitter handle is @NorthmanTrader.