ZERO BOUND?
Welcome to a new economic week.
Last week we were forced to carefully reconsider, not just the continuance of Australian rate (down) trends, as demonstrated in the charts below but also the emergence of “the word”, inflation.
What if rates were to fall to 0.50% and the cost of living went up by 5% in a low growth world? We’re not there yet but fairly sure (noise out of RBA) Aussie QE starts first quarter next year after one more downward rate move.
Who do you know that wants to decrease their income whilst increasing their cost of living? Central Bankers, that’s who! Certainly, the RBA is focused on increasing inflation.
We’ve said it before and we’ll say it again, they will eventually get the inflation they so desire! The big question is, can they stop it when they want?
Investors would be wise to consider this possibility closely, even though it has not happened yet!!
Back to the main game.
Those waiting for a market correction over October got the catalyst they were waiting for. But for the central bank “panic button”, again, it would have been a mighty correction.
As we penned in our last note, the first “event” was an explosion in short-term “repo” rates, below.
Probably nothing.
Since this event the US Fed has kept its foot on the throat of the above short term rates to the tune of “whatever it takes” AND recommenced QE to the tune of $30BILLION PER MONTH>
Looks like “NOT QE”.
The grand sum of 3 rate cuts plus $280BILLION added to Fed balance sheet in 2.5 months is what you do when you have the best economy, EVA!
This now means we have every major economic power in the OECD in QE money printing mode. We’ve never had this before.
As we mentioned above, judging from the amount of QE “noise” emanating from the Reserve bank of Australia mouthpieces, Australia will join the QE party first quarter next year.
So, Central banks have our backs, why not just buy all the things?
If you are one of the diligent types that saved for dutifully for your retirement and concerned for another leg down in interest rates, we understand.
If you feel compelled to look elsewhere for income, this is natural, you’ll have to take more risk.
Central banks, globally, are now fully committing themselves to the creation of inflation and, despite their failures, are not to be underestimated.
Low rates? Borrow more! Like the 64% increase in US corporate debt in 9 years, to 10TRILLION, looks contained!
Check this out for fun. This is only Government debt. Australia may be lagging below but leads the world in Private debt to GDP. Proud.
Oh, and we wonder about a growing Central Bank trend to steer away from the USD a little, wonder why?
