Even though the Federal Reserve continues to talk about raising interest rates sometime this summer, it is clear that the economic data continues to show remarkable weakness. The chart below shows that in terms of overall macro data, this has been the weakest start to any year since the 2008/09 recession.
This weeks retail sales report drove the point home. This was the worst back-to-back drop in retail sales since 2009, and this came during the key Christmas period.
Nevertheless, consumer discretionary stocks made new all time highs immediately following this data! The dislocation between fundamentals and markets has widened even further this year and it is important to understand why.
Very simply, central bank liquidity has reached a new level of dominance over security prices, far beyond what has conventionally been understood as “market” prices. It is a situation previously beyond the imagination of investors and traders.
The chart below shows that for the first time ever in history, Sovereign Net Issuance, after central bank purchases, will be negative!!!!!!!!!!
This is a new milestone in the monetary madness of the central banks. It levitates the role of central banks to powers far beyond the initial intentions, and leaves the banking system in a position of astonishing control, which essentially amounts to a new kind of central planning.
The assets and liquidity of the banking system, now overwhelm the markets in the short term. In that sense, markets can almost completely dislocate from fundamentals. However, the further we have moved down this road, the more debt has grown while global economic growth has continued to decline.
Banks make leveraged gains from debt. Sustaining this exponential concept has become the dominant purpose of the economic system and it has passed its sell by date.
I believe the best way to navigate this extraordinary set of circumstances is to adopt the Cycle Dynamics approach.