2019 Market Themes
As the year draws to a close, on not just another year but also a decade, it’s appropriate to take a look at the 2019 market themes.
One of the major 2019 market themes was the Fed chair Powell Put
The Fed’s 180-degree policy U-turn from monetary policy normalization, also known as monetary accommodation to monetary easing in 2019 triggered the risk-on trade.
Fed Powell Put was one of the major 2019 market themes, which kept the ageing bull market running.
The Fed put plays out when traders are convinced that the central bank is willing and able to adjust monetary policy in a way that is bullish for stocks and other risk assets.
So Fed Powell made monetary policy adjustments to accommodate the market.
First, was the Fed’s rate cut trio in 2019 to a range of 1.5% to 1.75%, which signaled no end in sight for further cheap money for the institutions nearest the Fed’s liquidity tap. Moreover, the Fed’s decision to abandon quantitative tightening and returned to Quantitative Easing (QE), which entailed more asset purchases kept the bulls energized in 2019. So the Fed kept buying assets, in what was amusingly referred to as not QE4, where its balance sheet expanded by approximately $60B a month to dampen the fire in the Repo market.
If the Fed chair Powell Put was one of the 2019 market themes, could it continue to be so going forward?
Perhaps it gives us a false sense of security to think that financial markets are mapped out like a schematic diagram.
What do I mean?
The market assumes that if the central bank’s liquidity tap is turned open, then that will switch the risk-on trade.
Everyone is all aboard the buy stocks, buy risk assets trade because the Fed’s has got their backs covered with endless cheap money and QE to infinity.
But the fundamentals don’t jive with current stock valuations.
There is countless evidence to doubt the strong economic recovery narrative.
Furthermore, the S&P 500, which tracks stocks of 500 large-cap companies, is officially in an earnings recession.
Why too did the Repo market short term rates spiral to 10% in September?
So stocks are floating at an all-time high on the central bank’s pink cloud of fiat money. It is a jaded game that has been played out by the central banks for more than a decade since the 2008 financial crisis.
Negative-yielding bonds make up another one of the major 2019 market themes
Stocks are hovering near all-time highs, even though there is about $13 trillion in negative-yielding bonds. Think about it. If investors were so upbeat about the economy then why are they prepared to hold bonds that on maturity will end up getting less money than they paid for them, even including interest?
Could this be a heads-up that the central bank’s monetary easing has reached the end of the road?
Markets do not behave like the laws of mechanics. At some point, the Fed Put will no longer work. This could happen when investors on mass stop buying into all-time high stock valuations and wait for rational prices.
Perhaps the $13 trillion in negative-yielding bonds is an indication that we are already there.
Another one of the major 2019 market themes is the ballooning dollar-denominated debt
US dollar-denominated debt to non-bank borrowers reached an unprecedented $11.5 trillion in March 2018. US dollar-denominated debt has reached the highest recorded total in the 55 years since the Bank of International Settlements has been tracking it.
The ballooning dollar-denominated debt has received relatively little mainstream media attention, but I believe it is a big story that could influence the trajectory of monetary policy going forward.
In short, a hike in Fed fund rates increases the cost of servicing those massive debts by raising the borrowing costs. Moreover, borrowers outside the US dollar are doubly hit hard, when the Fed hikes rates and the US dollar appreciates in their local currency. Emerging-market dollar loans are particularly sensitive to the US dollar appreciation and rate hikes.
Through 2025, emerging market governments and companies face $2.7 trillion in dollar-denominated bonds and loans.
Inflation, rising costs, has also been one of the major 2019 market themes
The Fed’s initially touted its inflation target at 2%, but in December 2019 it is now considering a rule that would let inflation run above its 2 percent target. This is yet another potential shift in its monetary policy this year.
So the narrative that the Fed is eager to stoke inflation could be false. The reality most likely is that the Fed is fearful of inflation and hiking the Fed fund rates.
If the Fed were faced with unwelcome inflation then they would encounter two hard choices, to either tame inflation by raising the Fed fund rates, but that might trigger a blow up in domestic and international loan defaults. Alternatively, the Fed could ignore inflation which could result in a domestic price-wage inflationary spiral.
But maybe the fourth industrial revolution, the mechanical mind will continue to displace human labor from the real economy at an alarming rate, which will dampen price-wage inflation.
In the next decade, 2020 humans need not apply.
The impact of the fourth industrial revolution is yet another one of the 2019 market themes that will become more dominant in the next decade
Affronted with rising unemployment, as blue and white-collar jobs vanish into cyberspace, policymakers are going to be tackling real problems of what to do with millions of displaced workers.
Window dressing the jobs report will no longer work as hiding the reality, the growing number of loan defaults, retail closures, known as the retail apocalypse, becomes impossible to hide.
Could Universal Basic Income come to the rescue, another one of the 2019 market themes, also take a front seat in 2020?