Ive been following SC’s (high net worth private client) wealth management weekly report for a while. To my mind its been accurate and timely in its recommendations and insights. It nicely brings together the key fundamental and technical strands of world asset markets, monetary and fiscal policy all in one weekly report.
The ECB’s unlimited actions, albeit with conditions, is super important for world asset markets and particularly the European financial sectors. As i picked on the forum pages, immediately on the live stream of the ECB yesterday SC also picks up on here..
“most important component of the program, in our view, is the fact that ECB purchases could be potentially unlimited, and do not hold seniority to any other bond holders”. SC – sept12
Onwards we march and all eyes to the FED to introduce yet more monetary ‘non standard’ measures next week in their attempt to monetize debts. China over night expanded their own fiscal stimulus program as Brazil did last week. The BOJ made yet more noises to take more dramatic actions of their own a few days ago. To ignore all these fiscal and monetary moves would be very unwise in my opinion. We are moving to a highly expansionary monetary strategy across the world which has significant fund allocation implications.
In terms of my own book i expanded balance sheet significantly heading into this period. The moves in risk assets have been immense but fund flows remain negative. I read all this as hugely bullish but as an “inflationist” i could be biased. In SC’s report from last week i see this chart as follows as being hugely important.
This chart above confirms to me that central bankers and policy makers are together working hard to embed positive inflation into the system once again. Each new monetary event occurs at a higher nominal level of inflation. We are still at an early stage but this chart is a exponential chart not linear note. Ie the early moves look small but over time its the compounding that kills you. This fits the text book theories perfectly and what is what we expect to see from neo Keynesian policy makers. Neo Keynesian’s have done away with old Keynesian views that government’s fiscal plans must counter balance economic cycles. Contemporary Keynesians believe perpetual deficits are not a problem so long as spare capacity exists. And furthermore public deficits are irrelevant to rich developed world economies as monetary measures can and should be taken to stimulate demand if public deficits are high.
Neo Keynesians aside, simply put, policy makers are seeking to correct the debt levels relatively via inflation. Ie debts can increase but so long as gdp expands nominally (via inflation) at a faster rate than the debts then debt will relatively decline to gdp. For this strategy to work nominal inflation must rise above the rate at which debt is increasing and at present it is not and is a long way from the mark to make this occur. Monetizing debts is an obvious and highly inflationary way to make sure this occurs.
Those that understand the “nuts and bolts” of how these systems work will likely do ok in the coming years, luck or rather bad luck aside. Those that are ignorant of these issues are likely to see their incomes and wealth be significantly eroded via inflation, rising tax burdens, fiscal expropriations, capital controls and much violent swings in the boom and bust economic policies Keynesian’s create.
One way or another the books of the consumer and governments must be balanced. Inflation or the debasement of developed world currencies is clearly the strategy to be adopted in the coming decade. Nominally this implies a golden period for risk assets although clearly volatility should be high due to geopolitical issues and spikes in inflation. The trend is clear although the oscillations we will have to manage as and when they occur.
Here the report.
Have a great weekend all.
Rich
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