Friday, October 9, 2015

This Is The Endgame, According To Deutsche Bank.... ...ANOTHER PESKY FACT!

This Is The Endgame, According To Deutsche Bank

The real end game is the one as I have said from day one: total fiat and conventional economics collapse.

Now Deutsche Bank Agrees......

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 this forces them to do even more thus supporting asset prices if not the global economy.

However since the summer this theory has been severely tested by China's equity bubble bursting, China's small 'shock' devaluation and the start of a rundown in reserves for the first time in over a decade. We've also seen associated commodities and EM woes, endless unsettling speculation about the Fed's next move and more recently the idiosyncratic corporate scandal around VW and funding concerns around Glencore. The hits keep on coming. Is it now so bad it's actually bad again?

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 / depression.

So for now we think central banks are trapped into continuing on the same high liquidity path. The BoJ and the ECB are likely to do more QE and the Fed is going to have a real struggle raising rates this year which has been our long-term view. Indeed we have sympathy with DB's Dominic Konstam that they may also struggle in 2016. At the moment central banks are fortunate that they have the conditions to do more as virtually all are failing on their mandate to keep inflation close to or at 2%. The real problem would be if inflation was consistently looking like breaching 2%. Then central banks would generally be going beyond their mandate by printing money and keeping rates close to zero. So in short the 'plate spinning' era continues.

We think the end game is that when the next global recession / depression hits, then QE/zero rate world will be re-appraised. 

For now, a lot depends on whether the turmoil accelerates the next recession quicker than we think. I THINK IT WILL! 

If 2016 is a recessionary year for the US and the global economy with China growing notably south of 6% then risk assets will fall significantly further.

Yes we've moved into a higher volatility world. 

In short it's a highly inefficient global economy and financial system. 

Doing more of the same that has already failed, is all that's left.

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