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Oct 11, 2016

I hope you enjoy my overview of Randall Forsyth’s Up & Down Wall Street column from this week’s Barron’s magazine.

 

In it, I discuss what some are calling “peak liquidity” and a turning point in Central Bank crisis policies.

 

Overview

 

  • Taper tantrum 2.0 - the subtle suggestions from central bankers that, after 8 years, they may begin to move away from crisis policies
    • Ultralow interest rates
    • Massive securities purchases with the click of button
    • Medieval alchemists would have been jealous
  • Policies have been less than impressive, some academics say it’s because they haven’t been administered in strong enough doses
  • Former Treasury Sec Lawrence Summers recently endorsed the Fed purchasing corporate debt and equity securities
    • Yellen has said this would not be out of the question in future crises
  • Backlash against these policies has been brewing from outside the academic and mainstream economist fold
    • Ex: British Prime Minister Theresa May
    • Ex: Donald Trump
    • Central Bank leaders no longer seem like super heros
  • CBs seem to be considering a fundamental shift in policies
    • BOJ will begin targeting yield curve of Japanese gov bond mkt, aiming for 0% on the benchmark 10-year JGB. This is a shift from targeting a quantity of bond purchases to targeting a price. In theory, this could mean a reduction in purchases assuming targets are met.
    • ECB is considering a gradual reduction in securities purchases
  • Jeffrey Gundlach commented on the growing belief that interest rates will “never” rise by saying that when it’s said that something can “never” happen, it’s about to happen, he argued. He went on to say that zero or neg interest rates are doing more harm than good, the decline of Deutsche Bank (DB) is an example. You can’t help the economy by bankrupting the banks.
    • For these reasons and more, he believes the low in bond yields have already been seen (10-year treasury fells to 1.36% post-Brexit).
  • Major trend changes appear to be at hand.

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