Statistically, September is the worst stock exchange month of the year and this September week is also statistically the worst week of the month. There are, of course, many explanations for the bad sentiment, possibly even the falling leaves have something to do with it. The main reason why markets have recovered so strongly from the trough earlier this year is the liquidity of central bankers and governments. It is this month’s liquidity factor that is making the most significant contribution to the correction. In the United States, liquidity is threatening to peak: monetary policy is levelling off and there has been no progress on CARES 2 since July.
Monetary policy is levelling off
At the end of August, Powell gave a speech at the virtual meeting of central bankers, formerly known as the Jackson Hole conference. The Fed Chairman indicated that inflation was also allowed to move above target for some time and that the Fed would rather be late than early in raising interest rates. That in itself is a broadening of monetary policy, but not a policy that will allow inflation to reach the target. This has not been the case in recent years, despite all the measures taken. Prior to this conference, there was speculation about Yield Curve Control (YCC) by the Fed. From now on, no more quantitative easing, but qualitative easing. The Fed no longer fixes itself on quantity, but on price, which automatically means that the Fed is prepared to buy up unlimited quantities. There is no such ceiling on interest rates, and for the time being there seems to be nothing left in the barrel. The Fed’s balance sheet has risen rapidly this year from USD 4 trillion to USD 7 trillion but has been moving sideways for some time. Liquidity is addictive, the market wants more, but does not get it.
Who CARES 2.0
One of the first measures taken by the American government was the CARES-Act (Corona Aid, Relief, and Economic Security). This measure amounted to more than 2 trillion dollars and ensured, among other things, that the unemployed received extra money from the government, so much so that many of them had even more to spend than when they were still in work. The effects of the CARES Act were even visible in the poverty statistics. This year, for the first time in a long time, poverty fell in the United States. Clearly, this has helped to keep the economy afloat. However, some measures of the CARES Act have come to an end and the end of September is an important deadline for the extension through CARES 2. However, the unexpected death of Chief Justice Ginsburg means that the Senate is dealing with other matters first, not CARES 2.
Compensation outside the US
Worldwide, however, there is increasing liquidity. In Europe, the ECB and the European government are encouraging this through, among other things, the recovery plan. The Bank of England is encouraging because the United Kingdom has been hit hard by Corona and also because a hard Brexit is being driven. In Japan, Kuroda is trying to make the transition from Abenomics to Suganomics run smoothly and even the Central People’s Bank of China is opening the tap a little further. The Fed seems to be waiting for the federal government. If it does not get off the ground, putting further pressure on the financial markets, the Fed will be forced to intervene. With so much debt in the world, it is unwise to lower the prices of assets financed by that debt. After all, financial stability is a new and important objective of the Fed.
Not a peak in liquidity, but a pause.