‘Test And Fail’: The Worst-Case Scenario
Earlier this month, BofA's global equity derivatives team warned of a "test and fail" of the vaunted central bank put.
The idea is that policymakers are constrained in their capacity to backstop markets by the primacy of the inflation fight.
That's dangerous enough on its own, but the most perilous aspect of policymakers' predicament in 2022 is the fact that markets are apprised of central banks' reluctance to jeopardize progress along the road to tighter financial conditions by reinstating th
“Fingers crossed that this is, as some still insist, an idiosyncratic problem confined to the UK. And that the dynamics (and therefore vulnerabilities) across locales aren’t the same.”
Gilts are repaid in pounds and GBP/USD has been generally decreasing for a long time (e.g. since 1931). If the BOE agreed to repay GILTS in USD at some fixed exchange rate (e.g. $1.10 per pound) with a backstop by the Fed, would this make any difference to markets? GILTS are repaid in pounds and the BOE can provide liquidity in pounds; if investors are concerned about the future value of the pound (in relation to the dollar), then what is the upper bound for GILT yields? The UK economy in general looks weak (e.g. Brexit, the Tories, energy, etc.).
At this point, dollarization of the UK doesn’t seem far fetched. Once someone proposes this seriously we will have reached peak GILT yields.
It is fiscal policy that overloaded the inflation picture not the irresponsible monetary policy that “only” gave us the asset inflation.
Wait until companies pull back on hiring, investment, etc. It is starting but once CEOs find a pinch in their paychecks it will accelerate.
We are headed to QE4ever at some point in the next 18 months if the Fed focuses on the inflation of today.
We are repeating the same mistakes of ’08 imo.
Either outcome will not impact me in any meaningful way but this path is going to hurt the middle class and lower more than this temporary inflation boost (driven by horrible fiscal policy mainly).
The Fed (and a lot of the street) should be wiser (unless they want to engineer a friends and family asset discount plan).
I HIGHLY doubt we will be talking about 5% inflation this time next year. BUT we will probably be talking about 6% unemployment.
Everyone is so myopic and groupthink!!
I welcome everyone to tell me I am wrong this time next year (or correct). 😉
I hope you’re right, and I am the furthest from an economist or finance person, but
I don’t think US companies are going to be making a lot of money in China
US consumers will be buying less from China
Russian Oil is not coming to the West for awhile
The republicans and their forces are interested in instability in the next 18 months
I could go on, but its time to harvest my homegrown cannabis 🙂
Legally, I might add.
H-Man, vanishing posts?
H-Man, all this Bank of England, gilts, pension plans smells like derivatives and leverage. A recipe for disaster that can spread like a cancer. Do the Brits pivot or do a head fake?
Meanwhile T-Bills at 12 months yielding 4% looks like nirvana. I can see why the bond crowd is excited.