I fear the next phase of financial asset repricing will be both disorienting and destabilizing.
This dynamic has become all too familiar: when instability turns sufficiently serious, markets instinctively anticipate dovish central bank policy responses.
And if the recent loosening of financial conditions has been spectacular, just wait until the next de-risking/deleveraging-induced tightening. Let’s call it what it is: Epic Monetary Disorder.
Reliance on some “neutral rate” to calibrate monetary policy is deeply flawed doctrine. The Fed’s assumptive 2.5% neutral rate may have seemed reasonable during the recent “Risk Off” backdrop. In the current squeeze rally environment, however, it is Indefensible – or, in the words of Mohamed El-Erian, “comical.”
If your financial adviser is not talking about the this or including it in allocation advice you might need a new advisor. It is a new investing world.
Crisis Dynamics are now overwhelming the “Periphery.” Things are “breaking.” “Hot money” is exiting China and EM, spurring a self-reinforcing dollar melt-up speculative dynamic.
At this point, I doubt the unfolding global liquidity crisis can be contained. And I wouldn’t be surprised if an intense bout of global de-risking/deleveraging erupts between now and the Fed meeting.
Market upheaval has turned systemic. No place is safe. And the Runs have commenced.
…more pressing, the blowup in Kuroda’s JGB yield peg gamble might be only weeks away. At this point, market operators (i.e. the leveraged speculating community) smell blood. Shorting JGBs at a 25 basis point yield – in today’s backdrop of surging global inflation and bond yields – provides a rare risk vs. reward opportunity for speculating in a multi-trillion dollar market.
A Bubble: “A self-reinforcing but inevitably unsustainable inflation.” An Experiment: “A test; trial; a tentative procedure or policy; an operation or procedure carried out under controlled conditions in order to discover an unknown effect or law.”