The bullish arguments in the market are no longer based on robust earnings or economic growth. Those are expected to be weak. Rather, it’s policymaker intervention to the rescue. I remain very skeptical about bullish moves in risk assets based only on intervention. Economic growth has historically been the prominent driver of asset appreciation.
Today’s chart is from Scott Barber at Reuters, and it helps to further illustrate my point. The chart shows Euro zone money supply growth as measured by M3, vs. private sector loan growth from banks.
As I showed in my CotD from last week, the ECB’s balance sheet more than doubled between 2007 and 2012. Despite that fact, money supply growth has been the weakest in the EU in the last 12 years. The key takeaway is this: inflation is almost always a function of credit creation by private sector banks. When private sector banks are unwilling to lend, deflation is the much more likely scenario. That’s why the ECB has been pushing on a string despite its massive interventions in the past 5 years. Banks are still not healthy or stable enough to lend to private counter parties.
As a result, I’ve always viewed economic growth or earnings growth as the main bullish argument. When central bankers are the final bullish crutch, the bull case is much more tenuous. The strength of that crutch will be tested over the next few weeks.