If “missing” inflation is the bane of central bankers’ existence in the post-crisis world, it’s simultaneously the best thing that ever happened to risk assets.
Investors are starting to figure out that the best of all possible worlds these days is decent or even robust incoming growth data against a backdrop of still subdued inflation. It’s a “have-your-cake-and-eat-it-too” type of deal. You get to claim that the case for staying long risk is supported by the “synchronized” recovery in global growth, while citing below-target inflation as the reason why central banks aren’t likely to spoil the party by pulling the proverbial punch bowl away.
By relying on antiquated models and targets that are so narrowly construed as to be almost meaningless, policymakers have given themselves an excuse to keep easing. Indeed, as we saw with the Riksbank on Thursday, even if inflation surprises to the upside, you are effectively forced to pretend like ultra-accommodative policies are still necessary to “sustain” the uptick because if you claim victory in a world where everyone else is still easing, your currency will appreciate rapidly on the perception you’re set to tighten, thus reversing the gains in inflation and putting you right back where you started.
The ultimate irony in all of this is that in their never-ending quest to “find” inflation that’s supposedly “missing” from the real economy, policymakers are creating all kinds of inflation in financial assets. That creates the conditions for a painful correction which, when it finally comes, will be promptly trotted out as an excuse to go right back to easing.
So you know, how we ever escape this loop of absurdity is anyone’s guess.
Perhaps the most amusing thing about it all is that it’s become so ubiquitous and reliable that it can now be summarized succinctly in the form of a bullet point (and apparently “bulletproof”) investment thesis. Here’s Barclays doing just that in a new presentation aptly entitled “Still Hakuna Matata”
Growth: A synchronized global recovery, for the first time in several years, led by economies outside the US
Inflation: Weak prints in recent months are positive for risk assets, and deflationary fears of years past (in the EU and Japan) are unlikely to resurface
(HR: so, just enough disinflationary pressure to keep central banks from tightening, but not enough to create a deflationary nightmare)
Central Bank Policy: Stop worrying about Quantitative Tightening (QT). Fed balance sheet run-off is less than appears at first glance, while the ECB will likely move very slowly.
So when we asked earlier if “everyone can be right” when every asset class is seeing simultaneous inflows, I suppose the answer is “yes.”
Because you can make a case for pretty much anything if you accept the dynamic outlined above as somehow “healthy” and/or sustainable.