Macro Wrap – Economic Data vs. Central Banks

by Enis April 26, 2013 7:53 am • Commentary

One of the better analysts of historical price action is Ukarlewitz at the Fat Pitch Blog.  Yesterday he tweeted an interesting chart comparing developed market economic surprises vs. the relative performance of U.S. stocks to U.S. bonds:

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The economic data has sharply deteriorated in the past month, similar once again to the manner in which global economic data turned lower in the spring of 2011 and the spring of 2012.  So far in 2013 though, stocks have continued to outperform bonds in the U.S. despite the weaker economic data.  A large divergence has thus developed between the stock market’s performance relative to the broader macroeconomic data.

One argument is that central bank easing is more aggressive than ever, forcing more and more investors into stocks.  Cullen Roche at the PragCap blog had a stellar post and chart illustrating how central banks are decreasing the supply of financial assets relative to history, courtesy of Citi Research:

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The red line is the net issuance of securities over the past decade.  Clearly, the lower net supply of securities has likely been a major force in pushing asset prices higher around the world.

However, price action is telling me that the current monetary backdrop is not nearly as stimulative as it was in the 2010-2011 period.  Back then, every single asset class was rising, including emerging market stocks and commodities as well.  The fact that many markets around the world are down in 2013 is a signal to me that money is perhaps a bit more scarce than it seems when looking just at the chart of the S&P 500.  Regardless, we should all be paying more attention to the simple supply and demand of assets as a determinant of price, rather than all the other “fundamental” indicators that are so frequently perused.