We Are Entering The "Quantitative Failure" Narrative

For a decade, the world brushed off any concerns about soaring global debt under the rug for a simple reason: between the Fed, the ECB and the BOJ, there was always a buyer of last resort, providing an implicit or, increasingly explicit backstop to bond prices, in the process creating the biggest asset bubble in history as investors seeking return were forced to buy first fixed income securities and then equities and other, even riskier securities.

However, as BofA's Barnaby Martin is the latest to point out, "early 2019 will be uncharted territory for the market" because, after years of central bank purchases crowding investors into risky assets, this dynamic will now reverse. As Zero Hedge readers have observed on countless occasions, the yearly growth of central bank balance sheets is now turning negative as shown in the following chart.

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The upshot of this, in Martin's view, is that markets will continue to experience more “corrections” than normal, leading to bigger and fatter trading ranges for credit spreads in Europe this year.

However, as recent market events demonstrated, the deteriorating liquidity backdrop will weigh on economic growth according to the BofA strategist. As the next chart highlights, the global money supply has declined rapidly over the last year and a half, and in fact, global money supply growth (using M1) is flirting with the lows seen in mid-2008. This is a key observation because "while some economies, such as China, are now pivoting back to supportive measures, the high global debt will constrain economies’ enthusiasm for engaging in further rounds of stimulus" Barnaby suggests. And as chart 4 suggests, lower money supply growth has often pointed to weaker global economic momentum going forward, suggesting that absent a major change, a recession is indeed inevitable as Albert Edwards will be quick to add.

(Click on image to enlarge)

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