Tuesday 2 October 2018

The People's QE/ loose fiscal/ tight monetary policy era

Nominal GDP inflecting higher on Trumponomics stimulus Wages starting to see a bid (finally)? Underpinning the beginnings of a wage inflation cycle next year? Showing Fed hopelessly behind real economy on rates.

But a 2019 financial economy pressured by higher rates so Fed hesitant to keep hiking. 

So USD higher this year on Fed driven short squeeze, but as a peaking Fed cycle is priced in, USD enters a bear market in Q1 or Q2 next year. Amongst other conclusions

I was discussing with a contact the outlook for markets and policy and so on. We agreed while there are risks of an 08 style rerun, it also clear to the Central Bankers that there are some entities that are too big to fail within what are highly leveraged, credit and liquidity dependent systems. 

But we also agreed that; nothing is too big to slump. In other words a multi-year valuation bear market, induced by QE unwind and higher rates, the Central Bankers should take in their stride, as long as wages and the real economy are doing OK. 

They will hike rates and unwind QE just enough to put a squeeze on debt and asset markets but will still be loose for the real economy. 

The real economy being juiced by loose fiscal stimulus/ People's QE.

The US in H1 2018 has seen non-financial debt grow about $2.7Tn annualised, or roughly 11% of GDP. US debt has never grown anywhere near this fast. 

The result has been to push nominal GDP up to a 7% handle from a 5% handle. 

Meanwhile the market discounts the Fed's hiking guidance for next year with only one hike priced in to September and the 10year struggles to get over 3%...


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