“Do the
central bankers know something I don’t know?
Is the global economy worse than I
think?”
March was about asset class rotation from equity to bond demand
with fixed income significantly out performing equities in March. Markets have
moved from the January monetary euphoria to something more cautious and
questioning. If the Fed potentially put all rate rises on hold for 2019 and the
ECB is delaying a course on normalization, do they know something I don’t know?
Certainly, there has been softness in a wide range of economic
data which is inconsistent with strong risk-on behavior. Nevertheless, the
almost complete reversal of forward guidance could be something that is a
greater warning sign. Central banks are showing nervousness about the economy
and this has spilled over to bond markets. The second quarter could be a time
of strong equity reversals as markets normalize to a slower growth economy.
Our
key policy statistic worth watching is real money growth. It has slowed
significantly and now hovers around zero growth in the US. It is one thing to
stop raising rates, but it is another to have money growth at extremely low
levels relative to the post Financial Crisis period. Tighter money from last
year is working its way through the credit economy and is a macro shock. Money
growth may have been excessive before the Fed started raising rates, but weaning
an economy off financial excesses is a difficult process and will have real
effects.
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