Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 

FEATURE ARTICLES

MACRO – MONETARY & FISCAL POLICY

 

TWO FLAWED HOPES: LIQUIDITY & STIMULUS

For decades the “go to” strategy anytime financial turmoil, crisis or shocks impact the economy the solution has been two fold: i) Central Banks to immediately inject large amounts of Liquidity to keep the financial plumbing working and solvent while ii) Governments inject stimulus spending through deficit financing to give the economy an adrenaline boost.  Both have proven effective in expediently stabilizing the disruptions at the hidden expanse of “kicking-the-can-down-the-road” and the political avoidance of resolving the underlying growing cancerous problems.  
 
Both can be argued have become tired, outdated and ineffective failed policy approaches. In the current environment they both are failing because: 
 
Neither Address Current Core Crisis Issues:
    1. Lost Incomes & Revenues of Consumers, Businesses & Governments,
    2. Increased Debt Levels,
    3. Lowered Working Capital & Cash Shortages,
    4. Lowered Credit Ratings & Availability.
Neither Stop:
    1. Bankruptcies,
    2. Reduced Solvency,
    3. Decreased Willingness/ Ability for Investors, Businesses & Consumers to Take Risk
Neither Liquidity & Stimulus will achieve:
    1. The Inevitable delay of the lowering of market PE ratios,
    2. The Inevitable forced Central Bank Buying of Markets through:
      • Direct Market Intervention
      • Indirect intervention in the form of never before undertaken policies of Lending,
      • Targeted market sector Guarantees,
    • Nationalization through the expanded use of Conservatorships like used for Fannie Mae and Freddie Mac,
As Consumer Confidence weakens, Investor Sentiment adopts an increasing risk adverse stance and Trust in Government and Central Banks policy responses erodes, the public will reject the promise of Liquidity and Stimulus as flawed and wanting.
 
SITUATIONAL ANALYSIS
 
  • CONSUMER CONFIDENCE: Since late 2018 US Consumer Confidence has fallen -37%.
  • CONSUMER SENTIMENT: The University of Michigan’s Consumer Sentiment Index has fallen -29% since year beginning 2020.
  • NFIB SMALL BUSINESS OPTIMISM INDEX: Has fallen ~-12% since Q1 this year.
  • INVESTOR SENTIMENT: The most recent AAII Investor Sentiment Survey shows 50.6% of investors are Bearish, 26.1% Neutral and only 23.3% bullish with markets have rebounded 61.8% since the CoronaVirus market plunge in Q1.
  • PUBLIC TRUST IN US GOVERNMENT: Has fallen from 77% during the Kennedy Administration to most recently 19% or -58%, with -30% coming in the lat 15 years of the public trust measurement.
  • CASH LEVELS: Cash levels of actively managed funds has increased 150% to 5% from a more traditional level of 2%
  • VIX: The VIX is presently at highs not seen since the top of the 2008 Financial Crisis. Prices for options has surged thereby significantly increasing the Cost of Risk and making it more expensive to hedge risk. Both place significant pressures on financial leverage.
  • CREDIT DEFAULT SWAPS: CDS’s costs have surged since year beginning increasing the cost of risk protection and thereby further pressuring highly leveraged lenders and borrowers.
TWO FLAWED HOPES: LIQUIDITY & STIMULUS 
  
LIQUIDITY

What we have witnessed since the launch of central bank policies such as QE and QT is that the moment the rate of increase of liquidity injections by the Federal Reserve slows the markets weaken and if reduced the market experiences severe dislocations until the rate is re-established and at higher levels. Currently after historic increases in liquidity by the Federal Reserve the US equity markets only regained 61.8% of its Q1 CoronaVirus losses and as the liquidity injections currently level off the market gains have once again flattened. How much must the next rate increase be to sustain rising markets and is that realistically possible?

STIMULUS

A dollar of Deficit Spending 30 years ago would deliver $3 to $6 of economic growth. Today stimulus spending, due to the existing size of Consumer, Corporate and Government debt has been shown to have become a burden on economic growth. Deficit spending servicing cost have been found to crowd out available investment capital into productive assets.

The twin government policy pillars of Central Bank Liquidity Injections and Government Stimulus via Deficit Spending will soon be found to be wanting which will further erode public confidence and trust.
FALLING EXPECTATIONS
As shown above, the broad array of Confidence and Trust measures has fallen precipitously which often precedes protracted periods of slowing growth, reduced consumer spending and falling corporate profits.
 

 
RISK IS BEING TRANSFERRED 
THE RATIO OF THE RUSSELL 2000 TO THE RUSSELL 1000 SHOWS THAT LARGE CAP STOCKS ARE SUPPORTING THE MARKET WHILE THE BROADER MARKET IS NOT RECOVERING TO ANY SIGNIFICANT DEGREE. 
EARLY BEAR MARKETS EXHIBIT THIS PATTERN 
 
 
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