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India Equity Research Reports, IPO and Stock News
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• In 2011, the puzzle fell into European laps, and investors are contemplating the
possibility of a policy failure with monumental implications for the European
project and the stability of the global economic and financial system.
• We expect that Europe's politicians will accede to the pressures from markets
and their colleagues in the international community and take steps to restore
the coherence of the Continent's finances.
• Thereafter, we expect a continuation of what has already become an epic
struggle against credit stress as the world’s leading central banks – including
the ECB – deploy their unique powers to seek to preserve the option of
prosperity, employment, and progress.
• We present forecasts for fundamental economic performance and a variety of
financial opportunities, with specific trade suggestions to help our clients and
customers navigate the year ahead. We thank you for the business
relationships we have enjoyed in the year past and look forward to continued
productive interaction in 2012.
Preserving Prosperity
In 2011, the global recovery was disrupted but not quite derailed by a seemingly endless
string of supply and demand shocks: to food and energy (Arab spring, droughts, Chinese
pork prices), to the auto and technology supply chain (Japan’s devastating earthquake,
Thailand’s destructive floods), and to faith in policy and politicians (the US debt ceiling
stand-off, the euro zone).
Almost none of this was, or could have been, predicted a year ago.
For the year as whole, the shrinking stock of “safe” assets has dominated returns, putting
portfolios under stress and challenging virtually all styles and strategies of investment
management.
This reflects, in part, the fact that global industrial production growth came in like a lion
and went out like a lamb, bumping down from a high of nearly 10% per annum in February
to virtually zero at year-end. Global GDP is barely crawling along but is also increasingly
divergent, with Asia subsiding from its recent boom, the US surprising positively, but
Europe plunging back into recession.
For the developed world, growth pessimism has become structural, and even for China,
faith in the future has hit its lowest level in a decade or more.
Even so, energy prices remain much higher than a year ago, and Asian food prices are
just starting to recede. In Europe, deflationary risks are escalating fast.
Risk appetite, on our measures, fared even worse than global growth. It is now struggling
to climb out of the deepest panic recorded in 30 years, beyond even the dire straits of late
2008. It has also undershot actual growth by a larger margin than ever before, beating
previous extremes in 1987, 1997/1998, 2002, and last summer.
As we approach 2012, these themes continue to stand out: divergence, financial fragility,
growth, and policy pessimism.
And one dominant risk feels almost beyond rational analysis.
Whether you think that the euro is a doomed concept or a great work in progress, we can
think of no safe break-up scenario in the short run. Failure to counter the deflationary tide
starting to rip though the euro zone’s defenses would likely have devastating
consequences for systemic stability and global growth, perhaps for globalization itself.
Might we be on the verge of a once-in-a-century policy failure that sweeps aside normal
assumptions, mean reversion, and investment guidelines? Are we about to suffer wealth
destruction on a scale not seen in peace time since the 1930s?
These are not computable risks, leaving the world awash with cash and short of
confidence about where, how, and when to put it to work.
In these circumstances, it seems foolish to offer the normal slate of confident predictions
for the year ahead but equally bland to venture no opinions.
We explore our few key themes from various angles in the body of the document, but our
conclusions rest on two judgments:
• In the end, Europe’s politicians, under intense pressure from markets and their
colleagues abroad, will pull back from the abyss of deflationary collapse in a region
producing close to one quarter of the world’s GDP.
• To do so, they will need to forge – within weeks, not months – what one might call a
pre-nuptial agreement on fiscal union linked to transitional funding for Italy, Spain, and
Greece that will dispel the most immediate doubts about the euro zone’s future.
Beyond that, however, lies an epic struggle between the forces of money and credit,
as the world’s leading central banks – including the ECB – deploy their unique powers to
contain credit stress and make possible the wrenching adjustments to payment
imbalances, sovereign debt burdens, and new financial regulations that lie ahead.
We don’t expect it to be pretty or easy, but if they are ultimately successful in 2012, they
will be preserving the option of prosperity, employment, and progress for a whole
generation, in the developed and emerging markets alike.
Executive Summary
Our thinking
We expect recession in Europe, but not globally. The risks are to the downside, and unlike
our central forecast of de-synchronization, those risks are globally correlated. We expect
massive policy intervention (The Economic Outlook for 2012).
At the heart of our view is the conflict between eruptions of credit stress that since 2008
have become both regular and violent and the increasingly unconventional and aggressive
efforts used by central banks to combat them. The effect is to suppress volatility until the
next credit shock arises (Chasm: Monetary Policy versus Credit Stress).
The euro area stands out for the enormity of its credit stress and for the ECB’s resistance
to the vigorous response successfully employed by the Fed and BoE to alleviate its effect
on the real economy. This route is leading to disaster. (EUR: Integration or Disintegration).
To avert collapse, we expect the ECB to initiate a program similar to the Fed’s and BoE’s
early in 2012. Even in that best case, as investors, companies, and households take
precautionary action, we expect a euro area recession and believe that basic financial
market functioning is threatened. We think that the loss of trust in political institutions will
leave deep traces in the financial markets and ensure that the next leg in redefining the
post-crisis global financial architecture occurs with a greatly diminished role for euro area
financial institutions (Right-sizing Euro Financials).
We also see in the euro area a microcosm of a broader and powerful set of forces
affecting all parts of the global economy, which we detail through this outlook:
• Challenges to our attitudes about debt: how far should individuals and countries go
to honor promises made by earlier generations for provision in old age or ill health
(Demographics: in Sickness and in Old Age), to what extent does the accumulation of
debt dictate future growth outturns (Questioning Reinhart & Rogoff on Long-term
Growth), and how do portfolio managers reconsider their approach to risk management
when what were the “safest” assets within an investment portfolio become risk assets?
• Wholesale changes to the structure of global finance: in the US, this was made
obvious when foreigners sold private credit post-subprime, which was immediately
“nationalized” against the sale of Treasuries, which were in turn then largely purchased
by the Fed. Our US mortgage team sets out how these actions (Absorbing the Excess
in US Housing), even though they stabilized the mortgage market, left excess supply in
housing itself that requires further ambitious private-public partnerships to correct.
• European deleveraging: it is, for us, part of the same basic process, with the
excessive growth of the EUR banking system a counterpart to Asian reserve
accumulation and dollar diversification. Without ECB purchases of distressed sovereign
assets, we see a merging of sovereign and banking sector risk at the ECB, but
ultimately, we expect greater convergence with the US to market-driven corporate
finance. The most efficient route is through EUR depreciation, but widespread defaults
remain an undesirable alternative (Right-sizing Euro Financials).
• Changes in the terms of trade: we also explore the ongoing ramifications of changes
in the terms of trade between the core and periphery of the global economy, with
increased influence for non-OECD countries in resource allocation (Defining the Risks
from Food and Energy Commodities) and a sustained change in the way in which the
market prices debt risk (Eroding Barriers Between EM and DM).
• Low nominal interest rates: finally, we highlight the growing realization in the US that
although the differences with Japan are many, the challenges of approaching
investment businesses amid persistently low nominal interest rates are the same
(The Double-edged Sword of Zero Rates).
Our recommendations
At a portfolio level, we see the conflict between monetary policy and credit stresses as one
whereby market liquidity, volatility, and correlation are inherently prone to regime shifts
(Macro Trade Risk/Reward). In 2011, it was the de-correlation of EUR sovereign interest
rates that caused the most pain as they became credit assets – as a result, looking ahead,
we see the approach of benchmarking to a sovereign bond index as irretrievably broken.
For US fixed income portfolios, the challenges are different, but no easier as the Fed
purchases the liquid assets typically held by these investors. Within the less liquid, creditintensive
sectors, our US strategists favor up-in-quality trades (Securitized Products).
Following are detailed recommendations that express our macro and policy views:
• In FX, historically very low dispersion in short-dated G10 rates means that the
risk/reward associated with carry strategies is very poor. With valuations unattractive for
pro-risk currencies, we expect USD and JPY to outperform. We favor dual digitals and
worst-of options that benefit from safe haven flows. Within EM, we recommend a SGD
outperformance trade against a basket of USD and AUD (FX Strategy).
• In rates, we see the US market as providing the best vehicle to express the view that
rates will remain low for long. We recommend receiving USD 3y, 2yr given our view
about the likely path of short rates, while in EUR, we view the roll in 5s as attractive on
the curve. In general, successful policy stimulus would be a steepener, but we see
scope to offset this in JPY rates. Finally, as a structural trade of the view that the
volatility surface will converge toward Japan, we recommend being long implied
volatility on 30yr tails versus 10yr tails (Global Interest Rate Strategy).
• In selected EM rates markets, we believe that increased monetary policy independence
offers value and note the increased correlation of EM rates with USD rates along with
evidence of the change in the drivers of EM risk premiums (EM Sovereign Debt and
Local Currency Rates).
• In credit, we favor being short EUR AAA risk. We also recommend using the currently
wide dislocation in German sovereign CDS-bond basis (European Credit Strategy).
• Across asset classes, investors seeking downside portfolio protection should consider
USD 3s1s basis wideners, Euribor puts, and generic equity downside rather than via
direct exposure to distressed sectors, in our view (Macro Trade Risk/Reward).
Looking further ahead, if European policy does migrate in the direction we envision, we
would expect a rebound in distressed assets but think that risk/reward is best outside the
euro area and that the euro itself will underperform:
• We like calls on WTI, where we see tight underlying supply conditions and a
risk/reversal in XAUEUR (Commodities).
• For investors sharing our view of pain before some relief, we recommend buying a 6m
10s30s CMS curve cap with a knock-in ATMF-25 bp (US Rates).
• More structurally, for investors expecting a further lengthy period of sluggish activity
before an ultimate rebound, we favor buying long-dated high-rate protection with the
proceeds from selling short-dated high-rate protection on 10yr swaps (US Rates).
From a cross-asset perspective, reviewing the combination of implied volatility across the
major asset classes in tandem with the macro scenarios we judge to be most likely for
2012, our preferred combination is to sell EURUSD calls versus buying calls on SPX
(Macro Trade Risk/Reward).
Chasm: Monetary Policy versus Credit Stress
Monetary policy response
The financial system is in a fragile state. Some institution, market, or instrument seems
always at the edge of breaking down – or just over that edge. Very low interest rates
throughout the developed world pose a significant challenge to the profitability of
traditional financial business models by reducing the rewards of maturity transformation.
New regulatory initiatives, including especially higher capital-to-asset ratio requirements
on ever more strictly construed asset classifications, inhibit the volume and profitability of
credit transformation. (No surprise there – that’s what deleveraging the developed
economies is all about.)
Ultra-low interest rates tend to be more persistent than ultra-high ones. This partly
reflects the asymmetry in the efficiency of monetary policy in stimulating versus restraining
economic activity. It also partly reflects the arithmetic of fiscal sustainability: low interest
rates suppress the debt service cost entry for debtor governments, while high interest
rates contribute to explosive debt-to-GDP dynamics. Finally, the exit from ultra-low interest
rates is higher interest rates – that is, a bear market in bonds. Bear markets tend to
expose and magnify financial fragilities; therefore, human nature tends to incline the
monetary authorities to a more cautious pace of raising interest rates. (Most central
bankers most of the time are more analogous to Neville Chamberlin; only rarely does
society empower a Paul Volker to play the Winston Churchill role.)
Although ultra-low interest rates are still performing their corrosive role on the
profitability of the financial sector business model, the sector is also trying to
accommodate an emergent regulatory environment.
One dimension of that regime is clear enough in outline. Banks and other financial
intermediaries will be required to hold more capital per unit of assets – that is, to
deleverage. There are two ways to raise a capital-asset ratio: add capital or subtract
assets. Raising capital has the potentially undesirable feature of diluting existing
shareholders. So banks will seek to accomplish at least some of their deleveraging by
shedding assets. But when all (or a large subset of all) financial intermediaries are seeking
to disgorge assets, market prices will tend to weaken, bid-ask spreads to widen, liquidity to
evaporate, perceived counter-party risk to rise, term funding to run for the hills – in sum,
the syndrome that has manifested repeatedly since the summer of 2007. When this
syndrome of financial fragility presents, the only balance sheet adequate to absorb
the orphaned assets is the central bank’s – hence QE.
The Bank of Japan has been at this longest and has gone furthest – to the point of buying
ETFs on its own stock market. The Bank of England and the US Fed have undertaken
significant QE, arguably with more of a focus on a portfolio balance effect to encourage
holding of riskier assets. The ECB has so far dipped its toe tentatively into these waters,
but we expect considerable expansion of its efforts, at least selectively, toward Europe’s
troubled sovereigns.
The bottom line is that QE is probably a necessary component of managing the
ongoing restructuring of the global financial system. As the old saying goes, “You ain't
seen nothing yet.”
That’s the First World central bank response. For the rest of the world, more conventional
monetary policy responses are still available (because policy rates are still well above
zero). Central banks in Australia and Brazil have already begun to cut rates to counter the
risks to global economic growth and financial stability. We expect more of the same from
them and expect others, such as India and Thailand, to join the easing policy posture soon
enough
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• In 2011, the puzzle fell into European laps, and investors are contemplating the
possibility of a policy failure with monumental implications for the European
project and the stability of the global economic and financial system.
• We expect that Europe's politicians will accede to the pressures from markets
and their colleagues in the international community and take steps to restore
the coherence of the Continent's finances.
• Thereafter, we expect a continuation of what has already become an epic
struggle against credit stress as the world’s leading central banks – including
the ECB – deploy their unique powers to seek to preserve the option of
prosperity, employment, and progress.
• We present forecasts for fundamental economic performance and a variety of
financial opportunities, with specific trade suggestions to help our clients and
customers navigate the year ahead. We thank you for the business
relationships we have enjoyed in the year past and look forward to continued
productive interaction in 2012.
Preserving Prosperity
In 2011, the global recovery was disrupted but not quite derailed by a seemingly endless
string of supply and demand shocks: to food and energy (Arab spring, droughts, Chinese
pork prices), to the auto and technology supply chain (Japan’s devastating earthquake,
Thailand’s destructive floods), and to faith in policy and politicians (the US debt ceiling
stand-off, the euro zone).
Almost none of this was, or could have been, predicted a year ago.
For the year as whole, the shrinking stock of “safe” assets has dominated returns, putting
portfolios under stress and challenging virtually all styles and strategies of investment
management.
This reflects, in part, the fact that global industrial production growth came in like a lion
and went out like a lamb, bumping down from a high of nearly 10% per annum in February
to virtually zero at year-end. Global GDP is barely crawling along but is also increasingly
divergent, with Asia subsiding from its recent boom, the US surprising positively, but
Europe plunging back into recession.
For the developed world, growth pessimism has become structural, and even for China,
faith in the future has hit its lowest level in a decade or more.
Even so, energy prices remain much higher than a year ago, and Asian food prices are
just starting to recede. In Europe, deflationary risks are escalating fast.
Risk appetite, on our measures, fared even worse than global growth. It is now struggling
to climb out of the deepest panic recorded in 30 years, beyond even the dire straits of late
2008. It has also undershot actual growth by a larger margin than ever before, beating
previous extremes in 1987, 1997/1998, 2002, and last summer.
As we approach 2012, these themes continue to stand out: divergence, financial fragility,
growth, and policy pessimism.
And one dominant risk feels almost beyond rational analysis.
Whether you think that the euro is a doomed concept or a great work in progress, we can
think of no safe break-up scenario in the short run. Failure to counter the deflationary tide
starting to rip though the euro zone’s defenses would likely have devastating
consequences for systemic stability and global growth, perhaps for globalization itself.
Might we be on the verge of a once-in-a-century policy failure that sweeps aside normal
assumptions, mean reversion, and investment guidelines? Are we about to suffer wealth
destruction on a scale not seen in peace time since the 1930s?
These are not computable risks, leaving the world awash with cash and short of
confidence about where, how, and when to put it to work.
In these circumstances, it seems foolish to offer the normal slate of confident predictions
for the year ahead but equally bland to venture no opinions.
We explore our few key themes from various angles in the body of the document, but our
conclusions rest on two judgments:
• In the end, Europe’s politicians, under intense pressure from markets and their
colleagues abroad, will pull back from the abyss of deflationary collapse in a region
producing close to one quarter of the world’s GDP.
• To do so, they will need to forge – within weeks, not months – what one might call a
pre-nuptial agreement on fiscal union linked to transitional funding for Italy, Spain, and
Greece that will dispel the most immediate doubts about the euro zone’s future.
Beyond that, however, lies an epic struggle between the forces of money and credit,
as the world’s leading central banks – including the ECB – deploy their unique powers to
contain credit stress and make possible the wrenching adjustments to payment
imbalances, sovereign debt burdens, and new financial regulations that lie ahead.
We don’t expect it to be pretty or easy, but if they are ultimately successful in 2012, they
will be preserving the option of prosperity, employment, and progress for a whole
generation, in the developed and emerging markets alike.
Executive Summary
Our thinking
We expect recession in Europe, but not globally. The risks are to the downside, and unlike
our central forecast of de-synchronization, those risks are globally correlated. We expect
massive policy intervention (The Economic Outlook for 2012).
At the heart of our view is the conflict between eruptions of credit stress that since 2008
have become both regular and violent and the increasingly unconventional and aggressive
efforts used by central banks to combat them. The effect is to suppress volatility until the
next credit shock arises (Chasm: Monetary Policy versus Credit Stress).
The euro area stands out for the enormity of its credit stress and for the ECB’s resistance
to the vigorous response successfully employed by the Fed and BoE to alleviate its effect
on the real economy. This route is leading to disaster. (EUR: Integration or Disintegration).
To avert collapse, we expect the ECB to initiate a program similar to the Fed’s and BoE’s
early in 2012. Even in that best case, as investors, companies, and households take
precautionary action, we expect a euro area recession and believe that basic financial
market functioning is threatened. We think that the loss of trust in political institutions will
leave deep traces in the financial markets and ensure that the next leg in redefining the
post-crisis global financial architecture occurs with a greatly diminished role for euro area
financial institutions (Right-sizing Euro Financials).
We also see in the euro area a microcosm of a broader and powerful set of forces
affecting all parts of the global economy, which we detail through this outlook:
• Challenges to our attitudes about debt: how far should individuals and countries go
to honor promises made by earlier generations for provision in old age or ill health
(Demographics: in Sickness and in Old Age), to what extent does the accumulation of
debt dictate future growth outturns (Questioning Reinhart & Rogoff on Long-term
Growth), and how do portfolio managers reconsider their approach to risk management
when what were the “safest” assets within an investment portfolio become risk assets?
• Wholesale changes to the structure of global finance: in the US, this was made
obvious when foreigners sold private credit post-subprime, which was immediately
“nationalized” against the sale of Treasuries, which were in turn then largely purchased
by the Fed. Our US mortgage team sets out how these actions (Absorbing the Excess
in US Housing), even though they stabilized the mortgage market, left excess supply in
housing itself that requires further ambitious private-public partnerships to correct.
• European deleveraging: it is, for us, part of the same basic process, with the
excessive growth of the EUR banking system a counterpart to Asian reserve
accumulation and dollar diversification. Without ECB purchases of distressed sovereign
assets, we see a merging of sovereign and banking sector risk at the ECB, but
ultimately, we expect greater convergence with the US to market-driven corporate
finance. The most efficient route is through EUR depreciation, but widespread defaults
remain an undesirable alternative (Right-sizing Euro Financials).
• Changes in the terms of trade: we also explore the ongoing ramifications of changes
in the terms of trade between the core and periphery of the global economy, with
increased influence for non-OECD countries in resource allocation (Defining the Risks
from Food and Energy Commodities) and a sustained change in the way in which the
market prices debt risk (Eroding Barriers Between EM and DM).
• Low nominal interest rates: finally, we highlight the growing realization in the US that
although the differences with Japan are many, the challenges of approaching
investment businesses amid persistently low nominal interest rates are the same
(The Double-edged Sword of Zero Rates).
Our recommendations
At a portfolio level, we see the conflict between monetary policy and credit stresses as one
whereby market liquidity, volatility, and correlation are inherently prone to regime shifts
(Macro Trade Risk/Reward). In 2011, it was the de-correlation of EUR sovereign interest
rates that caused the most pain as they became credit assets – as a result, looking ahead,
we see the approach of benchmarking to a sovereign bond index as irretrievably broken.
For US fixed income portfolios, the challenges are different, but no easier as the Fed
purchases the liquid assets typically held by these investors. Within the less liquid, creditintensive
sectors, our US strategists favor up-in-quality trades (Securitized Products).
Following are detailed recommendations that express our macro and policy views:
• In FX, historically very low dispersion in short-dated G10 rates means that the
risk/reward associated with carry strategies is very poor. With valuations unattractive for
pro-risk currencies, we expect USD and JPY to outperform. We favor dual digitals and
worst-of options that benefit from safe haven flows. Within EM, we recommend a SGD
outperformance trade against a basket of USD and AUD (FX Strategy).
• In rates, we see the US market as providing the best vehicle to express the view that
rates will remain low for long. We recommend receiving USD 3y, 2yr given our view
about the likely path of short rates, while in EUR, we view the roll in 5s as attractive on
the curve. In general, successful policy stimulus would be a steepener, but we see
scope to offset this in JPY rates. Finally, as a structural trade of the view that the
volatility surface will converge toward Japan, we recommend being long implied
volatility on 30yr tails versus 10yr tails (Global Interest Rate Strategy).
• In selected EM rates markets, we believe that increased monetary policy independence
offers value and note the increased correlation of EM rates with USD rates along with
evidence of the change in the drivers of EM risk premiums (EM Sovereign Debt and
Local Currency Rates).
• In credit, we favor being short EUR AAA risk. We also recommend using the currently
wide dislocation in German sovereign CDS-bond basis (European Credit Strategy).
• Across asset classes, investors seeking downside portfolio protection should consider
USD 3s1s basis wideners, Euribor puts, and generic equity downside rather than via
direct exposure to distressed sectors, in our view (Macro Trade Risk/Reward).
Looking further ahead, if European policy does migrate in the direction we envision, we
would expect a rebound in distressed assets but think that risk/reward is best outside the
euro area and that the euro itself will underperform:
• We like calls on WTI, where we see tight underlying supply conditions and a
risk/reversal in XAUEUR (Commodities).
• For investors sharing our view of pain before some relief, we recommend buying a 6m
10s30s CMS curve cap with a knock-in ATMF-25 bp (US Rates).
• More structurally, for investors expecting a further lengthy period of sluggish activity
before an ultimate rebound, we favor buying long-dated high-rate protection with the
proceeds from selling short-dated high-rate protection on 10yr swaps (US Rates).
From a cross-asset perspective, reviewing the combination of implied volatility across the
major asset classes in tandem with the macro scenarios we judge to be most likely for
2012, our preferred combination is to sell EURUSD calls versus buying calls on SPX
(Macro Trade Risk/Reward).
Chasm: Monetary Policy versus Credit Stress
Monetary policy response
The financial system is in a fragile state. Some institution, market, or instrument seems
always at the edge of breaking down – or just over that edge. Very low interest rates
throughout the developed world pose a significant challenge to the profitability of
traditional financial business models by reducing the rewards of maturity transformation.
New regulatory initiatives, including especially higher capital-to-asset ratio requirements
on ever more strictly construed asset classifications, inhibit the volume and profitability of
credit transformation. (No surprise there – that’s what deleveraging the developed
economies is all about.)
Ultra-low interest rates tend to be more persistent than ultra-high ones. This partly
reflects the asymmetry in the efficiency of monetary policy in stimulating versus restraining
economic activity. It also partly reflects the arithmetic of fiscal sustainability: low interest
rates suppress the debt service cost entry for debtor governments, while high interest
rates contribute to explosive debt-to-GDP dynamics. Finally, the exit from ultra-low interest
rates is higher interest rates – that is, a bear market in bonds. Bear markets tend to
expose and magnify financial fragilities; therefore, human nature tends to incline the
monetary authorities to a more cautious pace of raising interest rates. (Most central
bankers most of the time are more analogous to Neville Chamberlin; only rarely does
society empower a Paul Volker to play the Winston Churchill role.)
Although ultra-low interest rates are still performing their corrosive role on the
profitability of the financial sector business model, the sector is also trying to
accommodate an emergent regulatory environment.
One dimension of that regime is clear enough in outline. Banks and other financial
intermediaries will be required to hold more capital per unit of assets – that is, to
deleverage. There are two ways to raise a capital-asset ratio: add capital or subtract
assets. Raising capital has the potentially undesirable feature of diluting existing
shareholders. So banks will seek to accomplish at least some of their deleveraging by
shedding assets. But when all (or a large subset of all) financial intermediaries are seeking
to disgorge assets, market prices will tend to weaken, bid-ask spreads to widen, liquidity to
evaporate, perceived counter-party risk to rise, term funding to run for the hills – in sum,
the syndrome that has manifested repeatedly since the summer of 2007. When this
syndrome of financial fragility presents, the only balance sheet adequate to absorb
the orphaned assets is the central bank’s – hence QE.
The Bank of Japan has been at this longest and has gone furthest – to the point of buying
ETFs on its own stock market. The Bank of England and the US Fed have undertaken
significant QE, arguably with more of a focus on a portfolio balance effect to encourage
holding of riskier assets. The ECB has so far dipped its toe tentatively into these waters,
but we expect considerable expansion of its efforts, at least selectively, toward Europe’s
troubled sovereigns.
The bottom line is that QE is probably a necessary component of managing the
ongoing restructuring of the global financial system. As the old saying goes, “You ain't
seen nothing yet.”
That’s the First World central bank response. For the rest of the world, more conventional
monetary policy responses are still available (because policy rates are still well above
zero). Central banks in Australia and Brazil have already begun to cut rates to counter the
risks to global economic growth and financial stability. We expect more of the same from
them and expect others, such as India and Thailand, to join the easing policy posture soon
enough
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