After nearly a decade of easy money, the financial markets and the economy have not just become addicted to debt, but also indifferent to the continued growth in global debt.
Fed balance sheet normalisation
Mohamed El-Erian, currently chief economist with German insurance group Allianz, and touted as a possible sucessor to Stanley Fischer, believes that monetary policy cannot do any more. And that the governments of the democratic countries have not been capable of coordinating economic policies which solve the problems created by the last crisis.
Investors and observers have hailed the Fed’s decision to trim its balance sheet from October onwards as a turning point in the drive to normalise monetary policy. But a decline of $10 billion per month in the hefty portfolio the Fed has accumulated in recent years will hardly have any visible effect on the bond market.
J.L. M. Campuzano (Spanish Banking Association) | The global central banks are putting their plans for monetary normalisation on the table. But they also recognise that inflation risks are contained in the short-term. That means they have a margin of time to proceed with monetary normalisation in a cautious and patient way.
Nobody really knows why volatility has disappeared. In theory, there are more than enough reasons for the market to be nervous, and for investors to take advantage of this to obtain higher returns.
Currently, even yields on European high-yield bonds are below equity dividend yields, making investment in stocks a better way of generating income. For US bonds, the focus is on the Fed’s planned balance sheet normalisation.
The global economy is not yet back to normal after the crisis. The real figures continue to show that Larry Summers and his “Secular Stagnation” hypothesis are right. We are not strong. And every time we want to break the pessimism, the indicators are weak.
US Fed chair Janet Yellen and ECB President Mario Draghi will both be speaking at the Jackson Hole conference later this week. They will be under close scrutiny from investors for any clues on future monetary policy decisions. Analysts believe the Fed should matter more than the ECB at this week’s event.