The markets closed slightly higher yesterday after trading in a very narrow range for most of the session. The trade for downside in this market remains a one day affair, with prices always levitating off the lows and continuing to rally the following session.
Pre-market the UK is out with their Brexit Protection Plan. Like any good Central Bank these days it involves more propping of assets and a fresh foray into the corporate bond market. With the ECB already backing up the largest dump truck in the world and filling it with bonds of all shapes, sizes, and colors - including Junk Bonds, it was only a matter of time before another Central Bank follows in its footsteps.
S&P500 futures rallied on the news, and why not... Central Banks, with markets at or near record highs, continue to feed the free money. The stock market remains the only place left where gains are to be found. Yields are high on many names, offering a return in the the 'risk free' Centrally Bank Backed stock market. A stock like Metlife is handing out a 4% dividend to its investors. Mortage the 3rd vacation home and buy as much as you can.... we've never seen an insurance company go belly up before.
Next on the Central Bank Docket will be 30 day money back guarantee on stocks. Forget everything you learned in school.... Banks are not a place to save your money, put it all in heavily leveraged Fast Food stocks. You can't go wrong.
The risk returns when interest rates return to normal... whatever that new normal may be. For now easy money is fueling a debt binge and why not. If executives are getting paid via equity compensation, it is in their best interest to see that equity trade for as high as possible. Look no further than Dominos Pizza. Executives are celebrating its growth by taking more debt to issue dividends and buy back stock. Dominos, a 50 year old company has seen its stock soar 50 fold in the last 7 years as the company has increased its debt per share significantly. But again... when debt is free and you can borrow to enrich the executive team via share buybacks and dividends.... just borrow away. By the time the debt bubble bursts you'll be living on your own private island...
Corporations continue to pile on the debt, which is fine in a world where debt is almost free. The correlation between interest rates and debt since 1980 is rather obvious. What happens to Corporate Debt if interest rates ever start to rise?
None the less the free money tap remains open with Central Banks around the globe taking the baton from Ben Bernancke and running with the most unproven financial experiment in the history of the world. Negative interest rates. Corporate Junk Bond Buying. ETF buying. The Central Banks are going all in... and then some.
The Bank of England trimmed interest rates a quarter point to 0.25% and expanded its quantitative easing program to bring total asset purchases to 435 billion pounds ($572 billion). The latest purchasing managers' surveys for Britain's manufacturing, construction and services sectors showed that economic activity slumped to the lowest since 2009, at the height of the global financial crisis and pointed to a 0.4% contraction in the third quarter according to IHS Markit, which compiled the data.
Asset prices sit near or at record highs. In 2009 asset prices had dropped significantly. The World was on the Precipice of falling further into the economic cesspool. When Central Banks Lowered interest rates in 2008 and 2009, you didn't see too many arguments back then. But 7+ years later it's become more clear that every blip on the radar is viewed by the Central Banks as an iceberg about to sink the Titanic. The Central Banks are that soccer mom/dad who need to see their kid get that medal. We are world that doesn't let any one fail anymore. And the same holds true for the stock market and the economy. In an effort to a avert another failure (recession) the Central Banks have helped fuel a debt bubble like no other. One that will deflate if interest rates are ever allowed to rise. 35 year of ever decreasing interest rates has fueled a now parabolic rise in Corporate debt. The Central Banks are now even buying this debt, not just their own.
It feels like this charade could go on for many more years. However I think the recent Japanese admission that they must reassess their monetary policy is the first indication that Central Banks are beginning to question the effectiveness of their Policies. After all these were untested steps to prevent an even worse financial crisis in 2009. Not a means to give everyone a first place medal. A market that is not allowed to fail, will become a spoiled little brat, unless its allowed to win at everything.