(The author is editor-at-large for finance and markets at
Reuters News. Any views expressed here are his own)
LONDON, Feb 19 (Reuters) - Central bank support for
pandemic-hit economies looks to endure well past the recovery in
output, leaving investors little option but to keep chasing a
parabolic bull market until the fabled "punch bowl" is
William McChesney Martin - the longest serving Federal
Reserve chief between 1951 and 1970 - is credited with the
famous quote about the Fed's main job being to "take away the
punch bowl just as the party gets going" - or tighten credit
once the economy recovers from recession.
But an assumption his maxim will now be flouted to more
fully reflate the economy after the COVID-19 shock is already
stoking stock bubble fears and not a little angst about a return
of inflation akin to the one which emerged in the decade after
McChesney Martin departed the central bank.
This week's minutes from the latest policymaking meetings at
the Fed and European Central Bank did little to shift that view.
"Trying to time a market bubble wouldn't normally be a good
idea. But the near-explicit endorsement of the price action by
the Fed leaves investors with little choice," said Citi's global
markets strategist Matt King.
But just how much punch is still in that bowl - or indeed
how much more is still being poured in?
Bank of America's monthly investor survey this week showed
global fund managers were now almost fully invested, reporting
the lowest cash positions since just before the Fed first mooted
tapering its post-banking crisis bond purchases in 2013.
More alarming was that as few as 13% of them saw record high
world stock markets and valuations as a bubble - even through
MSCI's all-country index is already 20% above pre-pandemic
levels and has almost doubled since last March's trough. The
froth in everything from Big Tech to cryptocurrencies, penny
stocks, unprofitable startups or blank-cheque funding vehicles
does not seem to deter anyone yet.
One reason is that, far from being removed, the punchbowl is
getting routinely refilled.
THE DEVIL'S PUNCHBOWL?
Although percentage cash levels held by investment managers
are falling, they are not falling fast enough to keep up the
rapid expansion of money still flooding the system.
With total assets under management of $4.3 trillion,
cash-like U.S. money market funds still hold some $700 billion
more than pre-COVID levels - more than $300 billion above the
peak of the banking crash.
U.S. household savings at the end of 2020 were still almost
$1 trillion above pre-COVID levels, with U.S. M1 and M2 measures
of annual money supply growth - covering banknotes, checking and
savings accounts - running at almost 70% and 26% respectively
last month. Data in Europe is more lagged and less extreme but
shows a similar picture and no let up.
An 6% jump U.S. 'core' retail sales last month is another
way to view it - by revealing the instant impact of the $900
billion yearend government support package and the $600 stimulus
checks mailed out.
And that's all before the new administration of President
Joe Biden passes its planned $1.9 trillion stimulus plan, with
additional household support checks likely part of it.
This month's inflation warning from ex Treasury Secretary
Larry Summers stressed the Biden plan means $150 billion a month
for a year into an economy growing at a pace exceeding 6% -
where the 'output gap' from pre-pandemic potential is officially
estimated to shrink to $20 billion a month by 2022.
But how all this mechanically affects asset prices may get
closer to explaining near frenzy in markets of late.
Without tapering its bond buying or halting its balance
sheet expansion - and few now expect that this year - the Fed
will be adding $120 billion a month in bond purchases, in part
to keep all the new government debt affordable.
But Citi's King reckons that a reversal over the coming
months of a peculiar surge in the Treasury's General Account at
the Fed last year - as new government debt was sold but not
spent - could fuel the fire by inflating Fed bank reserves.
If Fed bond buying via creation of bank reserves is the real
driver of market pricing, King argues, then the expected $1-1.5
trillion rundown in the TGA over the coming months could triple
the $120 billion a month of bank reserves now being created.
The TGA ballooned last year by about $1.5 trillion between
March and July and now stands at $1.58 trillion - far in excess
of an average of about $350 billion over the prior two years.
King sees it as almost "negative QE" - only masked by a
parallel $3 trillion of Fed quantitative easing last year. Its
looming drain may have the opposite effect that supercharges
markets already awash with liquidity and pushing short-term bill
rates to the floor even as bond yields rise.
Others downplay the issue. TD Securities strategists
claiming the only time it makes a difference to risk assets is
during a 'reserve scarcity'. The effect will be limited to
suppressing money market rates and the Fed can adjust rates on
excess reserves to manage that.
But King doubts there's smoke without fire.
"The only real debate seems to be whether this is just an
issue for money market nerds, or whether it has system-wide
relevance," he said. "Both a long-standing conviction that
money-market plumbing has an underappreciated significance, and
some additional empirical evidence, make us suspect the latter."
(by Mike Dolan, Twitter: @reutersMikeD; Editing by David