Global stock (and bond and real estate) markets have been on a tear this year, apparently in anticipation of three big events. And last week they got them all, sort of:
The US and China announced a “trade deal” that is flimsy but a deal nonetheless; the Fed promised to refrain from raising rates until (official) inflation bursts through the 2% target and stays there – which might be a really long time; and Britain handed its pro-Brexit Conservatives a massive parliamentary majority, pretty much guaranteeing that departure from the EU is finally imminent.
The effect of all this closure is to remove what the markets see as the main outstanding risks, thus clearing the way for financial asset prices to rocket to the moon in 2020.
In other words we’re witnessing a classic “buy the rumor, sell the news” setup, because the trade war, Brexit and the Fed weren’t the real risks. Nor was their expected resolution the real reason stock prices have been hitting records.
What is the real reason? Insane levels of credit creation in the third quarter of 2019. Here are some of the highlights, culled from Doug Noland’s latest Credit Bubble Bulletin:
• Total US credit (financial and non-financial) jumped by $1.075 trillion in Q3, the strongest quarterly gain since Q4 2007’s $1.159 trillion, ending September at $74.862 trillion (348% of GDP).
• Non-financial debt surged $835 billion – double Q2’s growth — to a record 250% of GDP, up from previous cycle peaks of 226% at year-end ‘07 and 183% to end 1999.
• Federal government borrowings rose at a 10.4% pace.
• U.S. Mortgage Lending increased $185 billion, the strongest quarterly gain since Q4 2007.
• M2 money supply surged an unprecedented $1.044 trillion over the past year, or 7.3%.
This tsunami of newly created currency had to go somewhere, and the path of least resistance was financial assets. Year to date:
The S&P500 has returned 28.9%.
The Nasdaq Composite is up 31.6%.
The Semiconductors (SOX) index is up 55.5%.
The Nasdaq computer Index up 45.8%.
Banks (BKX) gained 31.3%.
Treasury bonds (TLT) returned 16.9%.
Investment-grade corporates (LQD) returned 17.5%.
Junk bonds (HYG) returned 13.3%.
So either this debt binge continues or liquidity dries up and financial assets get sold. Which means chaos of one kind or another is heading our way.