The weeks leading up to Britain’s vote on whether to remain in European Union included cataclysmic claims by economic “experts” as to what would happen to the world economy should Britain choose to leave the EU. In the few days after the vote to leave, the US equity markets and others dropped. However, within days the US market came roaring back and has since hit record highs.
Did the economic experts get it wrong? Did they purposely mislead? The answer is possibly both. Equities’ valuations are now more influenced by central bank action then market fundamentals. This type of perverse relationship governing economic activity is a classic warning sign of bubble creation, which ultimately always end badly.
David Stockman is a well-respected economist from the Reagan administration who then infamously questioned Reagan’s policies. He is written an article titled “This “Market” Discounts Nothing Except Monetary Cocaine”, which is a worthy read. His comments include:
- “The outlook for economic growth or corporate profits haven’t improved since the market’s post-Brexit low. The market’s new highs are just another party in the casino after the latest batch of monetary cocaine — helicopter money — was passed all around.”
- “That has been exactly the pattern of multiple rounds of QE and the unending invention of excuses to prolong ZIRP into its 90th month. The resulting rises in the stock averages, of course, were the result of fresh liquidity injections and the associated monetary high, not the discounting of new information about economics and profits.”
- “The reality of rapidly swelling deficits even before enactment of a massive helicopter money fiscal stimulus program will scare the wits out of conservative politicians, and much of the electorate, too. And the prospect that the resulting huge issuance of Treasury bonds will be purchased directly by the Fed will only compound the fright.”
- “In short, the market is not trading on a rebound in GDP, revenue growth or a breakout of already elevated profit margins. It’s just high on one more dose of monetary cocaine that in short order will prove to have been not even that.”
It is impossible to determine how much longer it will continue, or how high the equities bubble will go. But like all other bull markets, this one too will end irrespective of central bank interventions. If their actions to date have indeed created a bold, the downside will be significant, quick and come as a surprise to central bankers.