MACQUARIE: Central banks have tricked investors and created a ‘doomsday machine’

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machine france spider robotStephane
Mahe/Reuters

This may not end well. 

There’s an unprecedented level of calm across the markets,
whether it’s measured by the low volatility in US stocks or G7
currencies. Economies across the world are growing steadily, and
interest rates are still historically low — a desirable combo
some strategists like to call “Goldilocks.” 

Major credit for that apparent stability goes to central banks
and their several years of low interest rates and large bond
purchases, according to Macquarie’s Viktor Shvets and Chetan
Seth.

However, that also means any policy mistake could undo their
efforts and shake up the global economy. They’ve created “what is
essentially a long-term ‘doomsday’ machine,” Shvets said in a
note on Monday.

“We remain constructive on financial assets (both equities and
bonds), not because we expect a return to self-sustaining private
sector led recovery and growth but because we believe that an
ongoing financialization is the only politically and socially
acceptable answer,” Shvets wrote. “In our view, therefore, the
greatest risk is one of policy miscalculation.”  

The
reflation trade in US stocks was jolted after the
election, when Wall Street bet that the Fed would get a helping
hand from fiscal policy and tax cuts. With that, economic growth
and inflation were expected to pick up. But fumbles over
healthcare reform showed that this could take longer
than expected. 

Even if there’s eventually implementation, Shvets doesn’t see any
resulting economic growth as a result of higher consumption
and business spending. 

“Unfortunately, we do not see evidence that velocity of money is
improving and neither are there signs that sectoral balances are
moving towards sustainably higher private spending while
core inflationary pulse remains weak,” Shvets wrote.

“We continue to view China’s leveraging and CBs’ injections
of liquidity and suppression of volatilities as the key
drivers of global reflation. We also maintain that it is
unlikely that the Trump administration policies will lead to
any sustained gain in either consumption, investment
or current-account deficits.”

In short, the slightest mistake by central banks or China could
be disastrous. 

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