It’s important to note here that Werther doesn’t see a crash coming until after interest rates are raised—something he doesn’t expect to happen soon due to sluggishness in the Canadian economy.
No one knows what causes a bubble to burst. China has raised interest rates and limited speculators to one apartment each, but its housing bubble continues to inflate. What should worry Canada’s central bank is rising unemployment and decreasing commodity prices. Once people can no longer to afford to purchase homes, they will stop buying them.
JGB prices have become quite volatile since the BoJ announced its 2-2-2 policy in early April. The trick to accomplishing its goals will be maintaining the low yields for government debt while all of this extra cash magically creates sustained economic growth.
If the 10yr JGB rises to a 2% yield, Japan will be using all of its revenue to pay interest on its debt pile. This is a quite the tightrope that the BoJ must walk. While its purchases should suppress yields, there is always a chance that the market gets away from the BoJ resulting in disaster.
Cramer is right. There is no reason to fear the end of the rally. The Fed discussing its exit options is much different from the Fed actually ceasing QE. High unemployment coupled with low official inflation gives the Fed plenty of cover to continue printing money. In fact, I still believe that an increase in QE is more likely than an exit.
With former Goldmanite Mark Carney set to take over the Bank of England this summer, an expansionary monetary policy is on tap. The pound should weaken against the world’s major currencies. Even though the British economy is in better shape than its Eurozone trading partners, the pound will also weaken against the euro once QE begins in earnest.
Pimco’s El-Arian and Gross count among the vanguard that has criticized central bank easing. Their primary complaints are that the liquidity is distorting markets and creating zombie institutions, which do not fail but do not display viable growth either.
This article is really not as big a deal as the headline promises. The forecasts only have been cut slightly so that the survey consensus has dropped from 8% to 7.8%. The question not asked is how much of Chinese growth is productive and how much is just ghost cities and other make work projects? When China does crash, the Chinese people will wish they hadn’t squandered their earnings so foolishly.
The carry trade will not disappear. It will merely shift to different currencies. With the Bank of Japan easing at a record pace, it becomes cost effective to borrow Japanese yen. The interest rate is low, and the currency has been depreciating rapidly since November with more to come.
Last week, we noted the low yields for African sovereign debt as a sign that central bank easing had gone too far. Here are two more signals. First, investors are purchasing new, Greek corporate issues. Greece is still a country in flux, and anything can happen there at any minute. The rates are simply too low to compensate for this risk, but newly printed money has to go somewhere.
Second, the city of Detroit is about to declare bankruptcy; yet, its debt remains surprisingly buoyant trading at 94% the value of U.S. treasuries. This should not be happening. Detroit debt will be restructured, and creditors stand to lose principal.
The market has lost its signalling power due to central bank largesse, and anomalies like this will continue to pop up as long as loose monetary policy continues.