In 2020, the one figure that mattered most to global markets was
The most commonly asked topic when it came to financial markets in 2020 was why. Why did stock markets stage a monumental recovery in the midst of a global pandemic that killed some 1.7 million people worldwide and plunged the economy into the worst recession since the Great Depression, in order to hit new highs and become totally detached from reality?
And it wasn't just stocks, as there were epic rallies on everything smacking of carrying some semblance of risk, from junk bonds to Bitcoin.
Everyone has an explanation of how the markets have been doing. They range from the cerebral (markets are' forward-looking' and, once COVID-19 has been eradicated, investors expect a roaring economy) to the cynical (just buy the dip).
True, the market is mostly about what's going to happen rather than what has happened, and buying if the market steps back has been highly profitable in recent years. Neither, however, adequately explains the jaw-dropping 66 percent rise in the MSCI All-Country World Stock Index from its low at the end of March, the record low yields of junk bonds, the more than five-fold increase in Bitcoin values, or any of the other apparently unexplained market changes.
The response is a lot simpler and comes down to one number: 14 trillion dollars (18 trillion dollars). This is the amount by which the net supply of money in the US, China, the euro zone, Japan, and eight other developed economies has risen this year. To put the increase in perspective, according to data collected by Bloomberg, the leap to $US94.8 trillion ($125 trillion) exceeds all other years in data dating back to 2003 and blows away the previous record increase of $US8.38 trillion ($11 trillion) in 2017.
It's only part of the story to know what was behind the success of markets; knowing the mechanics is also relevant.
The place to start is with the central banks, which, by buying bonds and other assets on a scale never seen before, were instrumental in printing the money they needed to inject straight into the financial markets.
As of 30 November, the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England's combined balance sheet reserves stood at 54.3 per cent of the overall gross domestic product of their nations, up from about 36 per cent at the end of 2019 and about 10 per cent in 2008, according to data compiled by Bloomberg.
The Fed alone, through its acquisitions of fixed-income securities, is pouring at least US$120 billion ($158 billion) a month into financial markets.
Central bank purchases have helped to reduce bond yields globally, as calculated by the Bloomberg Barclays Global Aggregate Index, with the average dropping to less than 1% this year. Not only that, but bonds with yields below zero soared above US$18 trillion ($23.7 trillion), contributing to the financial repression that savers have faced since the financial crisis.
Of course, no one wants to buy bonds that pay almost zero, or even negative rates, unless, for regulatory or other purposes, they have to. The result has been a yield scramble, primarily for corporations' debt obligations and those with lower-investment-grade credit scores. Growing demand forced yields on bonds issued by these companies to an average worldwide record low of 4.59 percent. And so-called frontier nations are benefiting, such as Ghana, Senegal and Belarus.
Many know that, in exchange for lending money to borrowers at higher risk of default, these low yields don't provide a lot of compensation. They're not called 'junk bonds' for nothing, after all. This is why, for the first time, much of the money that landed in the hands of investors this year made its way into the stock market, raising the global stock valuation to more than US$100 trillion ($131.6 trillion) and the average stock price to a stratospheric 31 times earnings for a member of the MSCI All-Country World Index.
All the liquidity that governments and central banks have generated has also raised some tough questions about the real value of currencies.
There's no small number of people who assume that foreign exchange systems are on the verge of collapsing, not only this year, but more than a decade ago after the financial crisis, because of all the money-printing. This explains much of the stunning spike, as well as gold, in Bitcoin and other cryptocurrencies.
While many governments merit criticism from a social welfare perspective for their response to the pandemic, the swift action they have taken to help their economies in partnership with their central banks deserves appreciation amid concerns about the permanent "moral hazard," the never-ending support of financial markets by central banks and the wealth disparity that it has intensified.
It will be years, maybe a decade, until we know whether too much (or maybe too little?) liquidity has been generated by the pandemic to sustain the economy, nurturing the greatest bubble of all time and uncontrollable inflation. But imagine, if nothing was done, the alternative.