Next Up: Global Synchronized Easing

Global economic tightening is a pipe dream. It hasn't happened yet, and likely won't.

Bloomberg writer Komal Sri-Kumar says, and I agree, Dont be Surprised by a Switch Global Synchronized Easing.

>Global investors are positioned for a coordinated tightening of monetary policy by the worlds major central banks. Although the U.S. Federal Reserve is already far down that path, the others are just getting started. The European Central Bank is set to end its bond purchase program by year-end. The Bank of England is leaning toward hiking interest rates for only the third time in 10 years. Concerns were rising that the Bank of Japan could end the zero yield target for 10-year government bonds at its meeting last month.

>A factor that may induce the Fed to delay rate increases after September is the surging dollar. U.S. President Donald Trump has already complained that an appreciating dollar has blunted the competitive edge of U.S. exports. By increasing the cost of American exports to foreign buyers, a stronger dollar would increase the trade deficit that Trump considers to be an important measure of how other countries are taking unfair advantage of the U.S. On July 19, he openly criticized the Fed for increasing rates several times despite a long-held tradition that the executive branch avoids commenting on monetary policy.

>The ECB has to contend with a deteriorating economic situation in Turkey, which owes $467 billion to foreign creditors, including a large exposure to some of the euro zones largest commercial banks. The banks may have to write off a portion of their loans to Turkey, requiring an ECB backstop for vulnerable financial institutions rather than tighten monetary policy into a crisis. The central bank also has to deal with rapidly rising Italian sovereign bond yields due to the expansionary fiscal measures of the populist government that took office this year. Ending ECB bond purchases, or increasing the main refinancing rate above the current zero level, could increase bond yields in the regions southern fringe.

>The Bank of Japan concluded a meeting on July 31 by maintaining its zero target for the 10-year bond yield. The central bank justified its decision by confirming what we already knew, which is that despite five years of massive monetary stimulus, it was far from achieving its goal of a 2 percent annual inflation rate. Price increases have not met the 2 percent target anytime after March 2015, and consumer prices rose by a mere 0.7 percent in June.

>The message for investors is not to believe the tough rhetoric coming from central bankers but instead watch their actions and follow the data. The data suggest that rather than a tightening, markets may have to get ready for more easing during coming months. While the reasons for policy shifts may vary overly strong dollar, contagion from Turkey, Brexit-related fears or near-zero inflation rates the result is likely to be a more or less synchronized easing.

No Surprise Here

I won't be surprised. But first, it's important to note there was not synchronized tightening in the first place.

I commented on that two days ago in Global Quantitative "Tightening" in Pictures

Curiously, the Fed is so far behind the curve that the curve is now about to bite the Fed in the arse.

The reason is the Fed does not count asset bubbles, housing bubbles, or junk bond bubbles in its view of inflation. Those bubbles are about to implode which the Fed will count asymmetrically.

The question at hand is not whether there will be more global easing, but rather how stocks and gold reacts.

I don't know, nor does anyone else, but I am positioned for a rally in gold.

Mike "Mish" Shedlock

Comments (11)
No. 1-5
shred1
shred1

Peter Schiff's been saying this since QE3 ended, he said QE4 would happen. It will.

bolto
bolto

How can market correct if QE does not stop? Easing allows assets (funded by debt) to increase in value and as long as there is no need to settle debt, there will be no correction. Maybe this is too simplistic a view?

KidHorn
KidHorn

In order for our economy to function properly, the money supply has to continuously increase. Otherwise money would get scarcer per capita due to a growing population. QE is the primary mechanism for this. QE only works if the gov't goes increasingly into debt. It's naive to think deficits can shrink and/or QE can stop long term. It sounds good in theory, but in practice, it would be a disaster.

aqualech
aqualech

As a tangential musing, I wonder why anyone thinks that Italian interest rates should NOT be significantly higher? Its like weve completely dismissed the concerns about the PIIGS from yesteryear. Is the new CB and public paradigm that common sense and economic reality no longer need matter?

lol
lol

Makes sense,deficits soaring,inflation/shrinkflation/crapification rippin straight up almost at a 90 degree angle,depts/deficits all have a multi T (trillion)handle after 10 years of permanent never ending (money printing) "recovery" and never ending "improving" economy,and now central banks getting ready unleash the mother of all money printing schmes!