Is this it? Maybe. The Dow is down 5.6%% for the year (13.4% from its high); FTSE 100 down 12.5%; Toronto Composite down 11.6% ; German Dax down 18.3%; French CAC 40 down 10.9%; Japan’s Nikkei 225 down 12.1%; Australian Stock Exchange 200 down 6.9% and China’s CSI 300 index down 25.3% (source: Bloomberg). So, yes, we’ve had some decent falls but with the exception of China and possibly Germany they are barely sufficient to rattle the teeth.
We’ve been expecting and talking about the inevitable asset price correction for so long that it is probably foolhardy to suggest that this is the big “IT”. But if this isn’t the beginning of the end perhaps it’s the beginning of the beginning of the end.
The President of the United States is directing his invective at the Federal Reserve but his ire is erroneous and mistimed. We’re no fans of central banks – regular readers will be aware of our frequent criticisms – but to upbraid the Fed for finally doing what is absolutely essential is to ignore the perilous debt-financed asset bubble that has emerged since the financial crisis. The central bank trillions have enriched the favoured few but not the many and have done little to stimulate economic growth.
Recent OECD data indicates that in the first quarter of 2008 the balance sheet of the Federal Reserve amounted to 6.1% of GDP. It topped out at 25.4% in the fourth quarter of 2014. It is now steadily sliding thanks to deliberate shrinkage and is down to (a still hefty) 20.4%. In the eurozone the European Central Bank balance sheet kicked off 2008 at 15.9% of GDP and topped out at 40.0% in the third quarter of 2018. The ECB is now ending quantitative easing so shrinkage should commence in earnest in 2019. The Bank of Japan started at 20.9% of GDP in 2008 and is yet to top out as its version of QE continues apace. At present the balance sheet amounts to a whopping 99.1% of GDP.
So there you have it – unprecedented and extraordinary levels of monetary stimulation that have ended, are ending or will soon end (unless the BOJ decides to purchase the entire stock of domestic government securities – it is currently the proud possessor of around 45% of issuance). We have omitted reference to the Bank of England because in terms of trillions it is a mere minnow. The key point is that global credit is now contracting following a decadelong spell of extraordinary expansion accompanied by negligible interest rates. It is a sea-change that is yet to be fully appreciated by the markets.
Despite all the fervent stimulation the economic recovery since 2009 has been the weakest in the last 70 years. If measured in terms of GDP growth, labour productivity, fixed capital formation, consumption or employment the answer is the same. Employment data in the US tells the story. The US is now at “full employment” if government statisticians are to be believed but up until almost 8 years after the start of the 2007 recession the employment outcome was inferior to all others – and with the exception of the 2001 recession, that remains the case. The problem with the recovery from the 2001 recession was that after six years it bumped into the global financial crisis.