Politicians now officially run the Central banks and they are now clearly targeting asset prices. Check dis:
Embarking on the more extreme versions of QE (let’s say we could have stopped with QE1) was never a good idea to start with as the escape was always going to be very difficult (look up Nomura economist Richard Koo’s writings on the “QE Trap”).
Now that we’re obviously going to continue doing this globally, what are the problems?
1. They want to goose inflation so as to inflate away mounting debt with higher incomes (corporate + sovereign + household debt starting to pick up again, and this is just the US, think of the zombie NPLs in EU and China!). That’s great if you’re getting pay raises (are you a software engineer?) and blows for granny on retirement.
2. More debt; Blue chip companies are borrowing at low rates to finance buybacks
3. Mis-pricing of risk; income-starved pension funds, endowments, insurance companies, hedge funds, rich assholes with $$, etc are pushing down yields in everything (real estate, Italian bonds, litigation finance! etc)
4. More LYFTs (20x oversubscribed??? really???)
5. Do nothing politicians; in Europe, low-interest rates have allowed politicians to put off making the painful structural reforms to make economies more competitive and allowed the Germans to delay sharing liabilities and opening up fiscal taps to rebalance north-south intra-Eurozone imbalances. And in our banana republic, it has allowed Republicans to spend like Socialists :)
6. Green New Deal; don’t get me started… but part of the plan is to have the Fed subsidize this via low rates (and hints of MMT……..)
there’s more, but now i’m depressed…
the next recession will be ugly… central banks have little monetary cushion left short of plunging deeper into negative rates etc, and most governments have blown their fiscal wads (US is now over 100% debt/GDP).
There is a wall of corporate debt that is coming due in the coming years and they’ll be competing with Donny’s Deficits, economists call that crowding out, we haven't seen this in a long time (QE is relatively new). Should the USD start to slip as a reserve currency (it’s kinda already starting, sloooooowly, and weaponizing the USD ain't helping) this crowding out could result in HIGHER interest rates in a recession, regardless of what the Fed does… the kinda thing that usually only happens to EM countries… so what’s gonna happen in that recession? well, if Republicans are in charge they’ll resist military cuts and try to ax entitlement, and if Dems are in charge they’ll do the opposite. Either way, you don’t want to be cutting govt spending in a recession!
we’ll see what happens, this last doomsday scenario won’t happen tomorrow, in the meantime, can i have some vol back please???