This may not end well.
There’s an unprecedented level of calm across the markets, whether it’s measured by the low volatility in US stocks or G7 currencies. Economies across the world are growing steadily, and interest rates are still historically low — a desirable combo some strategists like to call “Goldilocks.”
Major credit for that apparent stability goes to central banks and their several years of low interest rates and large bond purchases, according to Macquarie’s Viktor Shvets and Chetan Seth.
However, that also means any policy mistake could undo their efforts and shake up the global economy. They have created “what is essentially a long-term ‘doomsday’ machine,” Shvets said in a note on Monday.
“We remain constructive on financial assets (both equities and bonds), not because we expect a return to self-sustaining private sector led recovery and growth but because we believe that an ongoing financialization is the only politically and socially acceptable answer,” Shvets wrote. “In our view, therefore, the greatest risk is one of policy miscalculation.”
The reflation trade in US stocks was jolted after the election, when Wall Street bet that the Fed would get a helping hand from fiscal policy and tax cuts. With that, economic growth and inflation were expected to pick up. But fumbles over healthcare reform showed that this could take longer than expected.
Even if there’s eventually implementation, Shvets doesn’t see any resulting economic growth as a result of higher consumption and business spending.
“Unfortunately, we do not see evidence that velocity of money is improving and neither are there signs that sectoral balances are moving towards sustainably higher private spending while core inflationary pulse remains weak,” Shvets wrote.
“We continue to view China’s leveraging and CBs’ injections of liquidity and suppression of volatilities as the key drivers of global reflation. We also maintain that it is unlikely that the Trump administration policies will lead to any sustained gain in either consumption, investment or current-account deficits.”
In short, the slightest mistake by central banks or China could be disastrous.