Recent surveys of global investors have something in common. They point to anticipated global monetary tightening as the thing most likely to lead to the next downturn in the markets and a recession.
If history is any judge, they have may have reason to be concerned. Transitions from monetary easing to monetary tightening are risky. Take the example of the Fed back in 1994. The Fed began increasing interest rates which set in motion the harshest slide in corporate bonds that had happened for two decades. It also set off a Mexican peso devaluation that led to the Tequila Crisis.
For a full decade now, the world’s major central banks have been busy flushing money through world economies and stock markets. Interest rates were held at near (or even below) zero by practically every important central bank. Now they have decided it is time to begin pulling it back.
This means that interest rates will now be going up everywhere in the future. What’s worse is that it is not just interest rates that you are looking at going up as a result of their actions.
The ECB, U.S. Fed, and Bank of Japan (among others) purchased literally trillions of dollars worth of corporate and government bonds. They hoped that this would lower borrowing costs for governments and companies, and motivate consumers as well as businesses to spend money again.
Now they are starting to let them roll off their balance sheets as they mature. The Federal Reserve kicked this off back in October with their mind-numbing four and a half trillion dollar balance sheet, shown below. It’s another way of tightening up on the money supply without actually using those words.
The global policy makers have come to the conclusion that their respective economies have recovered sufficiently to grow with a decreasing amount of stimulus. In Europe, the European Central Bank continues to buy corporate and government bonds but they too have spelled out their plan to reduce the amounts beginning in January.
Economic policy makers over in China are also anticipated to cut significantly back on the growth of credit. Even money-printing legend Japan will not be able to offset the worldwide drop in the collective central banks’ easy money. Economists now believe that they too will cut back from the middle to the end of the 2018.
As one Fund Manager Nader Naeimi of AMP Capital Investors Limited put it, “It will worry a lot of investors, because no one’s really prepared for it.”
Financial experts are still dueling about whether or not this stimulus was really effective in terms of economic growth. Yet they do agree on at least one argument. It was the easy money that forced global stocks (as well as bonds) to all time highs. The chart below says it all:
Is Your Retirement Portfolio Protected from the Withdrawal of Easy Money?
There has not been a truly meaningful correction since the bull market started after the Global Financial Crisis of 2007-2009. Markets at all time highs are only waiting for the right catalyst to lead to the next serious pullback. They hate uncertainty, and the prospect of the easy money (that fueled the rally) disappearing is enough to spook global financial markets.
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