central banks economy Markets

‘Simultaneous Combustion’.

"A double blow".

BofA’s Ajay Kapur is “delighted”, thanks for asking.

Specifically, he’s “delighted that the consensus opinion has shifted our way”, where that means the world has finally come around to the reality that rate hikes and quantitative tightening simply aren’t tenable in the current environment.

Back in December, Kapur penned an urgent message, imploring central banks to “please reflate”.

Suffice to say it didn’t take long for policymakers to come around. Starting with Jerome Powell’s January 4 comments in Atlanta, central banks the world over embarked on a coordinated dovish pivot designed to head off a downturn, help offset the drag from ongoing trade frictions and rescue markets – not necessarily in that order.

Since then, we’ve seen cuts from the RBNZ, the RBA, the RBI and enhancements to forward guidance (plus additional promises of accommodation) from the ECB and the BoJ. Now, the Fed is on the verge of embarking on an easing cycle – or at least that’s the way the market is pricing things.

“For many quarters now, we have argued that expectations of rate hikes and QT were inexplicable, and the rate CUTs were needed, given almost ALL our indicators signaled weakness”, Kapur wrote, in a June 5 note.

But if the question is whether he thinks it’s enough that everyone now seemingly understands the risks and the purported necessity of more easing, the answer is no. He believes the read-through of the Huawei escalation and the antirust investigations of big tech in America are evidence to support several of the key themes found in recent editions of his “Inquirer” series. Those themes, atop the trade tensions and already gloomy macro outlook, are a noxious brew.

“The rubber-band of the global economy is very stretched”, he wrote in March. “We see a possibility of peak plutonomy, peak polarization, and potentially peak oligopoly leading to more unorthodox potential solutions being offered in addition to anti-Buybacks, anti-oligopoly and anti-big Tech sentiment”, he added, fleshing things out.

Read more: ‘Expect The Unexpected’: One Bank Ponders Peak Plutonomy, Peak Polarization, MMT And 70% Taxes

Since then, the US has opened antitrust probes into Amazon, Google and Facebook, while inequality and polarization continue to define the contours of the political discussion.

Kapur takes note of recent developments, but before he does, he warns that “the current combination of an inverted yield curve (10yr less 3m, and the six quarter forward 3m rates less current 3m rates) AND the 4% YoY contraction in the global real monetary base is a toxic combination for growth and risk assets.” He calls that “simultaneous combustion”.


As you can see from the chart header, Kapur believes the morphing of the trade war into a “tech war” and the renewed antitrust push stateside, will make an already bad situation worse.

“This cyclically vulnerable zone is now contending with a double blow – a broad trade/technology war AND an anti-trust thrust in the US”, he warns, adding that “global oligopolies have been a key part of lifting ROEs, and financing buybacks [but] those bull market pillars are now suspect.”

On Monday, Donald Trump underscored tech’s antitrust jitters – sort of. Although he stopped short of casting monopoly aspersions, he suggested the US might look at fining big tech, if only because purported “discrimination” has left the president with a bruised ego.

BofA’s Kapur goes on to point out that the percentage of countries with PMIs in expansion territory has fallen to the lowest since 2015.


The upshot of all this is that central banks (and, likely, fiscal policy, to the extent monetary policy ends up running out of ammo) will look up a year from now and find themselves much looser than they anticipated.

“We think policymakers will be a lot easier globally than they currently think, or the consensus projects”, Kapur writes. He then chides policymakers anew. “The quicker they understand the deflationary risks, the quicker the recovery in risk assets.”



4 comments on “‘Simultaneous Combustion’.

  1. I think one of the problem is that there have been incomplete attempts in both easing and tightening in the past few years… Whether this is a comment about the politics or the state of world economies is perhaps the real question. The use of Sanctions especially by this administration does not bode well for anything except a high level of acrimony among major trading blocks.

    • Meaning to say here that if you insert a graph of the Fed funds rate over the asset sensitivity Chart displayed above it becomes apparent almost no variation in rates produces a huge equity swing … Could be a lot of factors contributing to that phenomenon but it certainly magnifies any level of manipulation to a high degree.

  2. Anonymous

    if memory serves….last time the fed started lowering it couldnt get infront of the mkt..chased it down lower and lower

  3. The Feds original mandate was to control inflation. Unemployment was later added to this. There is nothing about global economies and nothing about supporting equity markets.
    The Federal Reserves tightening policy has been acconpnyied by Large tax cuts oriented towards corporations and to a lesser degree towards individuals.This has not been the case in either Japan or Europe.
    Lower rates will benefit those with assets and will help very little those without assets. Lower rates will exacerbate the super stupid policy of stock buybacks and flippping houses while causing the middle class to shrink even further

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