Pandemic and Policy Measures: In 2020, the global economy underwent a sharp and brief economic recession caused by the Covid-19 pandemic, prompting policymakers worldwide to swiftly implement measures aimed at stimulating their respective economies. The US government responded by announcing a fiscal stimulus package of US$ 4.2 Tn*, while the US Federal Reserve reduced policy rates to near zero and expanded its balance sheet by US$ 4.3 Tn**.
Global Liquidity Surge: The implementation of policy measures led to a significant boost in global liquidity, causing the US money supply to surge to an unprecedented peak of 26.9%, surpassing the long-term average of around 7.1%. We observed a significant surge in demand, yet the supply side struggled to keep pace due to constraints. The combination of a robust money supply, strong demand, and limited supply resulted in an unprecedented inflation rate, reaching its peak at 9.1% in June 2022.
Hawkish Approach: In an effort to curb the escalating inflation, the US Federal Reserve implemented quantitative tightening by a rapid increase of the policy rates to 5.3% within the past 14 months. This was accompanied by a simultaneous reduction in the balance sheet by approximately US$ 95 Bn per month. The hawkish approach adopted by the Federal Reserve has led to an unprecedented occurrence: a negative money supply, with the YoY% change in the US money supply reaching -4.6%.
Torch’s Outlook: We believe that this unprecedented occurrence of negative money supply will have repercussions not only for the global economy but also for asset prices:
- We anticipate that global liquidity will be adversely affected due to the tightening policies of central banks and the limited availability of money supply.
- Economic activities could experience setbacks as the key driver (liquidity) is drained out of the system.
- We also foresee that this slowdown will impact companies’ earnings, potentially leading to an earnings recession in the future.
Hence, we hold a bearish outlook on risk assets and anticipate the possibility of a significant global asset price meltdown.
* Source: https://www.usaspending.gov/disaster/covid-19?publicLaw=all
** Source: Federal Reserve Total Assets Wednesday Level, Bloomberg, Torch Estimates
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