For obvious reasons, market participants are becoming increasingly concerned about what central bank policy normalization will mean for risk assets and whether, once the liquidity high tide begins to recede, volatility will finally make its triumphant return, upsetting all manner of applecarts in the process.
The road to hell is paved with good intentions (as they say) and so far, central banks have been loath to follow through on hawkish leans, and that reluctance is inflating bubbles-a-plenty across assets.
It does appear that’s no longer entirely lost on policymakers which is why a few folks have suggested that this time around, they may actually mean what they say about giving normalization a go.
Of course this will be a long and arduous process that may or may not be doomed to fail, and thanks to the combination of NIRP/ZIRP and QE, this is a two-part effort involving policy rates and balance sheets. Throw in the mix of assets purchases (MBS, corporate credit, and ETFs to go along with government bonds) and add in the BoJ’s YCC for a little extra confusion and you’ve got yourself a proper clusterfuck.
That makes the entire enterprise hopelessly complex, but in an effort to give you a kind of roadmap as well as a snapshot of where things stand currently, we present the following (possibly) useful flow chart from Barclays…