This Is The Endgame, According To Deutsche Bank


DB’s Jim Reid lays out the “endgame” scenario, one which this website first said is inevitable back in 2009. With Citi and Macquarie already on board, expect what was once merely the figment of a “deranged tinfoil conspiracy-theory blog’s” imagination, to become global monetary policy. And yes, the real endgame is the one we have said from day one: total fiat (and conventional economics) collapse.

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From Deutsche Bank’s chief credit strateigst

Our thesis over the last few years has basically been that the global financial system/economic fundamentals are so bad that its good for financial assets given it forces central banks into extraordinary stimulus and for them to continue to buy assets in never before seen volumes. The system failed in 2008/09 and rather than allow a proper creative destruction cleansing, policy makers have been aggressively propping it up ever since. This has surely led to a large level of inefficiency in the system which helps explain weak post crisis growth and thus forces them to do even more thus supporting asset prices if not the global economy.

The most recent leg of the sell-off begun after the Fed held rates steady two weeks ago as the narrative focused on either this reflecting worrying economic concerns or a Fed that is a slave to financial markets and losing credibility. So do we think we’re now entering a period where central banks are increasingly impotent? The answer is that they have been for a while on growth so not much has changed. However they can still buy more assets and continue to keep policy loose. Although we don’t think QE and zero interest rates does much apart from prop up an inefficient financial system it’s all we’ve got until we have a huge policy sea change which probably only happens in the next recession (more later).

We think the end game is that when the next global recession hits, then QE/zero rate world will be re-appraised. Perhaps the G20 will get together and decide to try a different approach. In our 2013 long-term study we speculated how we thought the end game was ‘helicopter money’ – ie money printing to finance economic objectives (tax cuts, infrastructure etc). While it has obvious flaws and huge risks (eg political manipulation and inflation), one can argue it will always have more economic impact than QE in its current form. However that’s perhaps a couple of years away still.

Yes we’ve moved into a higher volatility world. To be fair we thought this would be the case ever since the Fed stopped QE 12 months ago. This marked the point where there was a bit more two way central bank tension. The ECB and BoJ haven’t been able to completely offset it. However higher vol usually brings better entry levels and therefore it isn’t necessarily a bad thing when investing new money. Obviously it would have been better to have been more defensive this year which we regret but one has to regroup and look at things as they stand now.
For Q4, the seasonals start to look better. Experience tells you that if there is going to be a scare then August and September seem to be the months these scares get amplified. By mid October markets often enjoy a better run into YE and into the start of the new year. While it seems crazy to base one’s entire investment strategy on the calendar it’s not usually wise to go against seasonals. China’s data is probably the key macro factor though. If the data stabilises as our own economist Zhiwei Zhang thinks (he was more bearish than consensus in H1 but thinks stimulus will now kick in) then the market’s nerves will calm and vol will fall. If he’s wrong then we may have to consider a worst global growth outcome for 2016 and recession risks that mount. So a lot depends on China into YE. Given its opaque nature one can see why there is concern and confusion and whilst we’re medium-term bears on China’s economic sustainability we think for now they have ammunition to manage the economy – albeit one that is increasingly inefficient and propped up like many others around the world.

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Because doing more of the same that has already failed, is all that’s left. And, let’s not forget, there’s always this… (see chart above)

Full article: This Is The Endgame, According To Deutsche Bank (Zero Hedge)

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