Mayhem, maybe?
Tight monetary policy + loose fiscal policy ≠ neutral policy
It seems clear to us that policymakers have long past the point where reliance on excess liquidity will be able to mask the effects of overly tight monetary policy at some point in the future. This almost certainly means economic slowdown and a sharp fall in the value of risk assets, despite interest rate cuts. At that point, we expect the most active and powerful policymakers (The Fed/Treasury) to resort to measures to once again ‘bail out’ the economy and the markets from the mess that policymakers have inflicted. We expect the more hamstrung policymakers (The ECB/EZ governments) to lag, and we expect the more competent policymakers (the PBoC, MoF and NDRC) to watch these machinations with a degree of puzzlement and contempt. Risk assets in these regions will be expected to continue to behave accordingly –
Over the last 5 years, Chinese risk assets (black line) have generally disappointed – exhibiting much more stable, range-bound behaviour than US risk assets (blue line) which have overcome much steeper setbacks by behaving more like emerging or micro-stocks during the spectacular rallies from April 2020 to the end of 2021 and then once again from the autumn of last year. These have compensated for the sharp falls in 2020 and throughout 2022. European stocks (orange line) seem to have been the worst of both worlds – much higher realised downside risk during the 2022 and 2022 episodes than Chinese stocks creating a lower base from which to rally:
This would be consistent with the idea that US policy has driven asset prices much higher and has stepped in aggressively to place a floor under any setbacks, Eurozone policy has been a weaker, slower version of the same and Chinese policy has generally tended to simply disregard short-term risk asset performance.
American risk-assets are enjoying a rip-roaring party which is likely to lead to a huge hangover but don’t worry, the Fed will throw an even bigger party to ward off any ill-effects, although as John Hussman recently noted, share prices may well fall over -65% before that invitation comes through the letter box. We aim to avoid the hangover but also to be early to the next party
For any more background on these points or to ask us any questions, don’t hesitate to drop us a line.
These discussion points also form the basis of our May Outlook, provided to clients of MBMG.
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About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
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