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Marko Kolanovic Says Stay Overweight Stocks, EM, Flags Trump Risk, Warns Fed To Stay Vigilant
When the market last heard from Marko Kolanovic, the JPMorgan quant was busy detailing an "unprecedented" divergence between U.S. equities and the rest of the world.
Specifically, he noted that price momentum was positive for U.S. equities and negative for European stocks and EM "across all relevant lookback windows."
That, he observed, "has never happened before."
Given the rather stark juxtaposition, Marko suggested that "something will have to give".
It's not difficult to explain what a
I would bet there is going to be a full on trade war. You know Trump can’t give in…the obvious reason his ego wouldn’t allow for it. The China government can’t give in to Trump’s demands because it would make them look weak to their own people. As a result neither side can give in…reminds me of WWI
Allow me to begin by summarizing what I have said elsewhere at some length in these virtual pages. Many of us have the idea that economics is a hard science and its practitioners are basically engineers who can conform the economy to their wishes. There is a measure of truth to this, but economists are powerless to deal with serious dislocations like the GFC or Great Depression.
So, for example, over the course of the last decade the Fed has tried everything they can think of to deal with the GFC. They have arrested the manifestation of the unpleasant symptoms – like the bankruptcy of misguided projects that should never have seen the light of day – but they have not cured the GFC itself. The Fed has, however, created a flood of liquidity which has been used to inflate more and bigger bubbles. Worse, pursuing a near-zero interest rate policy over the course of several years has created a giant hole in the balance sheet of our pension funds.
Apparently, the Fed has (to their credit) realized that they can’t forestall disaster forever. Eventually, the dam will break, and when it does our situation will be much worse than what we experienced in 2008.
I suspect, too, that the Fed has concluded that of all of the various policies that they have pursued, only two were reasonably successful: lowering rates, and buying at par “assets” that can’t otherwise be sold except at a steep discount.
There is one problem, though. You can’t lower rates significantly if they are near zero, and you can’t buy an appreciable amount of assets if (at $4-trillion) your balance sheet is bloated. Given those circumstances, the only logical course is to raise rates so they can later be lowered and to allow assets to roll off so that you can later buy more.
Might there be fallout from this approach (like cratered markets in developed countries and particularly in the EMs)? Probably, but if disaster is inevitable anyway it’s better to get it over with before it has an opportunity to get even bigger. Moreover, there has to be an engine to pull the world out of the hole it has fallen in. If the Japanese and Europeans won’t take that step, it will have to be the US.