The next financial crisis will occur when the investment and portfolio management community (and ultimately the investing public) realizes that the central banks alone cannot restore the robust growth from prior to the 2008-2009 financial crisis.
That has been a consistently repeated focal point for every one of our analyses since we first published the underlined form of it in our Feb. 11 Market Fear & Loathing post. As our longtime readers know, this was all only the natural extension of our long held view on the political class’ failure to deliver structural reform. That was necessary to reinforce and enhance the cyclical gains encouraged by the many forms of very extensive central bank accommodation.
Negative rates are the end of the line
For all of the short-term success of the central banks extremely low interest rate and Quantitative Easing (QE) efforts, they were not likely to provide a return to real growth without structural reforms. In our March 23 Fed’s "Normalcy Bias" Crumbles post we specifically noted in the Limits of Central Bank Powers section “Negative rates are the end of the (very distended) line.” Evidently the Bank of Japan is feeling that in its lack of ability to provide what was somewhat broadly expected expanded QE and a move farther into negative interest rates today. Once it did not happen the global equities came under pressure.
Central banks cannot do it alone
As noted extensively of late, this is no surprise. And there is also a heightened sense in official circles that global central banks’ accommodation does not seem to be enough to reinvigorate the world economy… at least not back to anything resembling robust growth from prior to the 2008-2009 financial crisis. This finally had some real world impact in the poor performance of equities last Thursday after what was a still very accommodative European Central Bank press conference.
Speaking of last Thursday, that is also the last post where we extensively explored all of the most recent fundamental indications which pointed to the likely serial weakness in the economic data that has been vindicated since key insights earlier this month. Those include the most recent release of the Organization for Economic Cooperation and Development’s Composite Leading Indicators (CLI), and the lowered projections the following day from the IMF World Economic Outlook that was followed by the following weekend’s G20 concerns on central bank accommodation being insufficient to revive the global economy.
Official view catches up with Rohr
In other words, quite a bit of official perspective that is now consistent with the view we have held since early last year that the lack of structural reform was ultimately going to be a daunting problem. And in response to the idea that once that problem is identified there must surely be a solution, we are not hopeful. The highly partisan nature of the political landscape now along with more pressing matters facing the politicians in most major countries leaves little room for bipartisan agreement on anything so major as structural reforms including fiscal and tax, regulation, environment, etc.
Just consider ostensibly on of the most important economies for global growth in the US, which has seen quite a bit weaker than expected economic data of late. Is there any chance the highly partisan factions there are going to decide on major reforms until well after the November general election? Europe has the extreme reactions to the refugee crisis and the UK must deal with the European Union referendum in June, likely followed by negative sentiment from whichever side loses (likely the EXIT adherents at this point.)
There is no chance of structural reform in this environment. The United States is becoming more factional than two-party as well. The Democrats are being driven more so toward a fully socialist vision by the success of Senator Sanders with idealistic (and at the same time financially disenfranchised) young voters. The Republicans presumptive candidate can only be described as an entity unto himself, with no real operational base (and at this point quite a bit of acrimony) within the political establishment.
Negatives rule US election
And for those who are not following it as closely as we are over here, the ‘unfavorable’ ratings of each parties’ presumptive candidate are well above 50%!! This is very likely going to be one of those American elections where whomever more people are driven to vote against will determine the next President of the United States. All of which points out how hard it is going to be to develop any consensus on structural reforms; and that will not occur in any event until well into 2017. So, if the central banks are effectively out of ammunition (other than to not threaten tightening), where is the renewed global growth going to come from?
Seasonals not supportive
The reason that lack of structural reform is back to being so important now is the obvious deterioration of global and U.S. economic conditions that will likely determine the fate of already struggling equities as we head into more seasonally negative May and beyond. And while there were some other analyses along the way, we suggest checking the top portion of this sidebar for the most relevant insights. Those include that open source PDF version of our March 23 commentary: Fed’s "Normalcy Bias" Crumbles post. We will be adding links to the actual posts below it as further conditions develop.
The June S&P 500 future gapped up 10.00 to above 2,060 two weeks ago Wednesday and ran up above the more major 2,075-85 resistance last Monday morning. That also left a major weekly down channel (from the major May 2015 high) 2,078 UP Break. Sounds like a potential major new extension of the equities rally might be in order? Maybe. Maybe not.
The technical trend problem is the amount of time June S&P 500 future has spent ‘hanging around’ the 2,075-85 area, which also means that ostensible 2,078 major UP Break. This is not typical. It should have only seen the most fleeting test of that area into very aggressive buying if it was as bullish as that UP Break would suggest.
While the UP Break can maintain for a while, unless there is more aggressive extension of the uptrend above the 2,103-10 resistance which was tested last week prior to a post-ECB downside reaction, it could lead to much more weakness. In fact, that weakness in spite of accommodative views at the ECB meeting points out the degree to which central bank accommodation may no longer be sufficient to overcome serial weak data.
That premise has been gaining more adherents of late, and is now being tested after the still fairly accommodative FOMC statement Wednesday afternoon. Yet, with the BoJ refusing to proceed further into NIRP (Negative Interest Rate Policy) and more massively extend it already major QE program, equities are showing their lack of confidence that central banks already at or near the limits of policy alternatives can provide further encouragement; much less that highly elusive return to robust growth.
Thanks for your interest.
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