Ups and Downings
One Bloomberg headline says it all for markets: “All Time Highs in Everything American As Risk Rally Crescendoes” Yes, the S&P and Dow are at all-time highs and the talk is of when, not if, US bond yields hit all-time lows even before the Fed has made its first cut in this cycle. Indeed, USD Libor plunged the most in a decade yesterday and the US 10-year is flirting with below 2%, while there is chatter of both sub-1% and sub-zero. Frankly, would you rule either scenario out?
That will put even more pressure on the ECB and the BOJ and the PBOC to keep slashing rates too. Yet two of the three already have rates below zero, so what can they do? Either face a deflationary slump, or kick out the jams on fiscal policy. Of course, that takes us to lunatic monetary policy and lunatic fiscal policy combined, and a not very covert attempt at currency depreciation. Yet this was always the likely endgame in my eyes, not the recovery and rate normalisation we have been mis-sold for years. It certainly isn’t the sudden “But how did we get here?!” revelation this all seems to be for some (…he writes, thinking of that market talking-head who was speaking of 4% US 10-year yields not so very long ago.)
Meanwhile, in China it isn’t the cost of money that’s the issue, it’s the quantity – which is effectively limitless (just look at all the build-now-ask-questions-never projects permanently underway). However, money won’t flow where they want it to because China is suffering from both Soviet-itis, with its profitless look-at-me! gigantism, and New-normal-osis, where new credit can’t get to the parts of the economy which would benefit most from it.
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