Must-Read: Alexandra Scaggs: There’s No Yield, and Citi Isn’t Going to Take It Anymore

Must-Read: Alexandra Scaggs: There’s No Yield, and Citi Isn’t Going to Take It Anymore:

Citi’s Matt King has some harsh words for central bankers…

…echoes a group of fund managers who say central banks’ stimulus efforts are distorting the way global markets function…. With negative yields on $13 trillion of safe assets, investment managers are crowding into the shrinking group of investments with yield–or into securities they may be able to sell to central banks. This has been frustrating for those fund managers, to say the least. (This journalist remembers getting laughed at when she asked an expert how to determine the value of a Treasury security, because the Federal Reserve still owns more than $2 trillion of them.) Instead of gauging market fundamentals… investors are primarily concerned with the outlook for central bank policy. So they crowd into trades that could profit off of the actions of central bankers in Europe, Japan or the UK. That’s why Bill Gross and Paul Singer have both bemoaned the effect central banks have had on the global markets and the economy recently. Gross says it’s causing growth to stagnate, and Singer is warning of a sharp reversal.

King agrees. Here are some of the reasons he thinks markets are broken:

(1) A greater share of global equity-market variance is explained by macro factors…. (2) Credit spreads aren’t responding to climbing leverage and defaults…. (3) Normal market relationships are breaking down…. (4) Cross-asset correlations are high, even though volatility is low….

It’s clear that global central banks have had a big effect on markets. A bigger challenge is answering the following question: so what? Lower borrowing costs should be a benefit of central bank stimulus, you’d think. But King says corporate borrowing isn’t helping the economy as much as policy makers would like, and raises the risk that the leverage will make any economic downturn worse. He continues:

Most doctors–and even patients–know that when a course of drugs seems not to be working, you don’t simply keep on doubling the dosage. This applies particularly when the patient, if no longer as sprightly as they used to be, is nevertheless doing more or less fine. The side effects of such a course are more likely to kill than to cure. Yet this is what central banks now seem intent on doing. They have too much invested in their models to consider changing them in our view…


Brad DeLong
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