Do You Believe In QE Miracles?
“This is a very artificial market,” warns Allianz’ Mohammed El-Erian, and while markets are expecting an ever increasing pace of central bank buying of assets, their policies are no longer working…
This last weekend comes closest to the notion of an AGM for the global economy. At the annual meetings of the International Monetary Fund and World Bank, the heads of the two institutions reported on recent developments, prospects and policy implications. As The FT reports, El-Erian remarks that:
In sum, the AGM reinforces three concerns about the global economy.
1) Its prospects are becoming more fragile in terms of growth, financial stability, indebtedness and, therefore, inclusive prosperity.
2) Bizarre political dynamics add fuel to the fire, directly and by holding back timely policy adjustments.
3) The potential damage now extends beyond foregone opportunities to also undermining future potential, including open trading systems and politically-autonomous central banks.
This multi-faceted cocktail is brewing greater volatility. Yet risk premia in markets have been notably low and generally decoupled from realities on the ground — all reinforced by shorter-term mindsets, unbalanced incentive structures and moral hazard.
Like frogs swimming in a warm pot that is only slowly heating up to a boil, investors are generally calm for now, comforted by a distorted cognitive appreciation of their changing environment.
Blind spots and unconscious biases have been reinforced by the repeated prior episodes of effective central bank intervention that represses financial volatility. But if — or, rather, when — the water starts to boil, many investors would find it hard to jump out. Patchy liquidity and gapping prices would increase the cost and complexity of portfolio realignments.
Investors who ignore the messages of this weekend’s AGM do so at their own peril.
Simply put, you have to believe in miracles to buy now… as Deutsche Bank details, there is a lot of easing already priced in…
Unsurprisingly, the market implied QE percentage continued to rise through 2016 until only recently. This is clearly consistent with a static modus operandi by G3 central banks and yields which plumbed the lows as markets realized the reality of supply constraints to asset purchases and malign externalities on growth via financial repression. It is this realization which has prompted growing scrutiny of the current policy paradigm.
So do you believe in moar QE miracles?