The rise in equity indices in the wake of global pandemic and
its long term socio-economic consequences is keeping most experts busy. The
central bank bashing is the favorite theme of market participants, like anytime
in past 33years, ever since Alan Greenspan took over the Chair of US Federal
Chairman and assumed the role of the "champion of stock markets"
after 1987 market crash. Since then the markets have been overwhelmingly
depending on the central bankers to support any fall in stock prices.
Greenspan is criticized for both creating and causing the burst
of dotcom bubble in 2000. It is popularly believed that the easy monetary
policy unleashed by him during 1990s to support Clinton's deficit reduction
program led to creation of massive dotcom bubble. It is also a popular belief
that hiking rates many times by Greenspan in 2000 led to bursting of dotcom
bubble. Both the popular beliefs are however contradicted by the empirical
evidence. Greenspan was actually a monetarist who religiously followed the
Taylor Rule of inflation targeting. In 2000 also, he started raising the rates
only after the bubble had already burst. Till the party was on, he neither
hiked rates nor tightened the margin requirements. He again supported the
markets by a series of cuts post 9/11 incident and was widely blamed for rise
in asset prices, especially gold and building of sub-prime crisis.
The detractors of present Fed Chairman are criticizing him for
taking the economy for a tiger ride. They fear that the ride could end only in
one way, i.e., the tiger jumps off the cliff taking the economy into the deep
abyss with it.
(Strangely, back home RBI is being criticized for not emulating
the central bankers like US Federal Reserve, European Central Bank and Bank of
Japan etc.)
As an investor, I am carefully watching the global monetary
policy actions and taking note of the following:
(a) The printing of new
money by Fed, ECB and BoJ may not be too much of a problem as yet, as presently
the money velocity is at lowest in recorded history, and any new dollar printed
does not augments the money supply in any measure. So one should be watching
money velocity more closely rather than the amount of new dollar/EUR/JPY
printed.
(b) As per the Bank of
International Settlement recent data, the current total international debt
securities outstanding is over USD25trn. Out of this about 50% debt is denominated
in USD terms, and about USD2trn of this USD denominated debt is maturing in
next 12 months. Despite the unprecedented amount of load on the printing
presses, there may not be sufficient USD available in the world to discharge
these liabilities.
One should be watching this space closely to see how this debt
is discharged or rolled over and at what price. Shortage of USD in
international markets for discharging these liabilities could result in
temporary spike in USD exchange rates. The borrowers who are not fully hedged
against their USD liabilities could face serious solvency issues. Also the
effort to develop an alternate reserve currency, preferably a neutral currency,
shall also accelerate putting pressure on USD. This game of push & pill might
lead to heightened volatility in currency market raising the cost of hedging.
The impact on exporters' earnings needs to be observed closely.
(c) More than USD11trn
worth of bonds are presently yielding a negative return. This means the low
rates are here to stay for longer; and the central bank shall continue to pump
in cash in the system to grease the wheels of economy. The COVID-19 led deeper
recession shall require even more new money to fill the larger fiscal gaps. For
next couple of years this should not be too much of a worry for asset owners.
But one needs to be prepared for the eventual collapse of the fragile mountain
of debt.
....to continue tomorrow
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