"Debt drains away vital resources from economic growth. Fighting a debt crisis with more debt is doomed to failure, yet that is not only what global central banks did during the crisis but long after markets stabilized (though the crisis never truly ended, just slowed). This was an epic policy failure that continues today."
-- Michael Lewitt, The Credit Strategist
Two questions come to mind as we mark the eighth anniversary today of the Great Recession's official end. First, how much further will the current recovery take us? And second, how severe will the contraction be once this recovery ends?
I certainly can't predict the future, but I believe that we can find answers to the above questions by looking at the recovery's fundamental core. What has driven this eight-year expansion, and how will that impact the future?
Well, Brian Barnier of Valuebridge Advisors (among others) has demonstrated a 93% correlation between the market's growth over the past eight years and the amount of money created by the Federal Reserve's many expansion programs. This correlation can lead us to only one conclusion -- when central-bank monetary expansion stops, so will the current bull market. Paraphrasing a slogan from the recent past: "It's the debt, stupid!"
With that in mind, let's look in greater detail at our two questions above:
How Much Further Will This Recovery Take Us?
The answer to this question lies first in determining how willing global central bankers are to keep piling on debt with their many initiatives, from printing money out of thin air to manipulating interest rates. We then need to see how the investing public reacts to these programs.
