it's different this time
Look, I’m not a fan of these words but it seems everyone with a vote in Institutional Investor poll is.
Time and again we give those who utter these words a pass and in the very latest case in point, a strategist from a large German bank offers a chart and those famous words, as they relate TO the lessons learned from 2018 … aka the “worst” year ever…
… Today’s CoTD shows a chart we published a few times in late 2018/early 2019 showing that 2018 ended up being the worst year for global markets on record in terms of the breadth of losses. In USD terms, 90% of our global sample of 70 global assets (DM and EM, bonds, equities and commodities) saw a negative total return. None of the 30 global equity indices were positive. Clearly there was a strong dollar story but in local currency terms, it was only just below the worst year on record on this measure.
We wrote at the time (January 2019) when explaining the chart that “Between 2010 and 2017, growth (DM especially) was below trend but QE and negative/zero rates ensured asset prices generally went up in unison and volatility was crushed by the central bank put. Over the last 18 months or so growth has generally gone above trend but importantly for assets, central banks have moved from peak QE to QT. Their put has weakened and assets have been correlated on the downside and volatility has risen sharply.”
The fact that markets had a very healthy 2019 (all assets were higher in our sample) can almost certainly be traced back to that Powell pivot. If we fast forward to today the problem is we are at the start of this journey. QE is actually still ongoing (believe it or not) and the Fed haven’t raised rates yet. Timing is near impossible to get right without a modicum of good luck but if the Fed do embark on as aggressive a series of rate hikes and QT, as is looking likely, then at some point the probability of major market corrections across the board are likely. Where this period could be eventually be more serious than in 2018 is the fact that inflation is now a serious issue. This could reduce the ability of the Fed to pivot on a dime if financial conditions deteriorate sharply.
Imagine that, if you will. High and continually rising — or stable at higher than preferred level — inflation which then ROBS the Fed of the <Greenspan, Bernanke, Hobbit, JPOW> PUT? This is some mental gymnastics I’m not prepared to perform and frankly, don’t think it’s something ANY of us would remotely consider.
To the analysts point, then, it may very well be different this time in history … with a Fed so very dearly wanting to engage ‘the put’ but with its hands tied behind its back?
Maybe this is in fact WHY bonds (AND TIPS, too) had a bad year last week.