An eight-day rally in global equities marched on Wednesday, as investors continued to follow the stimulus Pied Piper — nobody bound these markets to the mast and the siren song of fiscal and monetary accommodation is alluring indeed.
The Riksbank implied inflation may not reach its target until 2024, in the course of promising ongoing “extensive” support. Monetary policy, the bank said, “needs to remain expansionary.” In Italy, yields are near record lows this week as markets see Mario Draghi as a sure bet when it comes to turning the country around politically and financially.
The dollar is back on the back foot, and that too is positive for risk assets. “The Bloomberg Dollar Spot Index’s retreat below the 50-day moving average should have bulls — who thought they were in the ascendance — growing nervous,” Bloomberg’s Eddie van der Walt wrote Wednesday. “The trade-weighted gauge had appeared to break out of its recent downtrend, but a fourth consecutive down day suggests celebrations may have come too soon.”
I’m not sure who was “celebrating.” Dollar strength isn’t good for the reflation narrative, nor is it conducive to easy financial conditions. That’s a simplification, but the bottom line is that incremental dollar weakness is usually a tailwind for risk assets.
As the dollar retraced recent gains, gold rose four days in a row. Market participants cited the usual debasement concerns around stimulus and inflation.
Platinum, meanwhile, is sitting at the highest in a half-dozen years. If you know any late-90s rappers struggling with solvency issues, now would be a good time to sell any superfluous jewelry gathering dust. (It’s all about thick, gold cuban links these days.)
As you can imagine, the bubble calls aren’t going away. They’re just getting louder.
“Anyone with a modicum of financial market experience and a pulse is well aware that the United States is in the midst of multiple, concurrent financial asset bubbles,” JonesTrading’s Mike O’Rourke said, adding that,
The root cause of the mania is the Fed. In pursuit of [a] very narrow inflation target, the central bank has spent most of the past decade… purchasing assets for the purpose of pumping liquidity into the financial system. The Fed’s catastrophic failure in its analysis is that although its policies have pushed financial asset prices higher, only 10% of the population own 90% of the financial assets. That’s too small a group for the broad based spending that is necessary to push consumer inflation higher.
That’s a slightly more abrasive version of my boilerplate take, which is just that central banks underestimated the efficiency of the transmission channel from accommodative policy to financial asset prices and overestimated the effect of the same policies on the real economy. The vaunted “wealth effect” worked — it just turned out to mean something different than economists thought it did. I’ll just roll out “that” chart again (below).
“It is quite clear, according to a slew of commentators, that the ‘Everything Bubble’ has become more ‘Everything’ and more ‘Bubble’,” Rabobank’s Michael Every remarked, in his characteristically colorful daily.
“The Fed and other global central banks are still pouring their fully operational firepower into the economy, fully aware that little of this flows to productive assets or wages, and most of it to speculation: But when financial/asset speculation IS most of the ‘economy’, that looks like victory to them,” he added. “Indeed, doesn’t it feel like victory to those who speak Bloombergian?”