Monday, August 15, 2016

They Say A Shock Is Needed
To Collapse The Market & 
".. we are in full financial repression mode, as witnessed by super benign core yields .. lower real yields .. further downward drift in euro peripheral yields, including the UK. The new high in equities is consistent with our view of financial repression that necessarily has yield returns on all assets being incrementally replaced by price returns – stretched relative valuations follow already increasingly stretched absolute valuations. The last round of economic data does little to suggest any change in this dynamic. As we highlighted last week the conundrum for the U.S. is how an overly strong labor market without meaningful wage inflation resolves itself against markedly weak productivity data with a GDP cake that if anything seems to be stagnating .. More importantly however are what prospects there may be to jolt us out of this financial repression and to what extent regardless of proactive policy, is there a natural end to financial repression – at some point does something have to break in the system? On the former the most likely candidate is obviously some form of global fiscal stimulus. Despite optimism around this in early July we have not exactly had the green light on either helicopter money in Japan or Italian bank bailout. It is still too early to call the U.S. election and stimulus prospects here but the general sense is that it is still difficult to sense the urgency when equities make new highs. Policymakers aren’t used to dealing with financial repression and that unfortunately is one of the defining characteristics of stagnation. We suspect the fall will be defined by markets looking for dramatic policy news that somehow 'responds' to super low bond yields and underwrites rising risk asset prices but only to be disappointed precisely because policymakers don’t bide the urgency. The result is that yields can fall still further even with risk assets still trading well – hanging onto their relative valuation rationale. The failure of a policy response allows for more financial repression .. Helicopter money fuses financial repression from the money side with the fiscal response in a potentially dramatic way ,, The conclusion is that without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy and bounce it out of a financial repression defined by low and falling real yields to one that at least initially is defined by rising nominal yields through higher inflation expectations. Ironically the shock that is needed would require a collapse in risk assets for policymakers to then really panic and attempt dramatic fiscal stimulus."
- Deutsche Bank's Dominic Konstam
LINK HERE to the commentary

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