The Fed is the new macro
Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer
Marchello Holditch, CFA, Vice-President CI Multi-Asset Management
As part of their March commentary, Alfred Lam, Senior Vice-President and Chief Investment Officer and Marchello Holditch, Vice-President, CI Multi-Asset Management, explain that stock markets have rallied significantly and consistently since 2009 when central banks cut interest rates to zero and increased the money supply through quantitative easing (QE) programs. Ten years later, these measures are largely still in place. Economists have described this as the “new normal.”
Stock markets have rallied significantly and consistently since 2009 when central banks cut interest rates to zero and increased the money supply through quantitative easing (QE) programs. Ten years later, these measures are largely still in place. Even though it is not their mandate, central banks have been supporting financial assets while promoting risk-taking without consequence. With no end in sight, economists have described this as the “new normal.”
Every now and then, central banks may attempt to bring us back to the “old normal.” In that world, lenders got paid a decent interest rate – ideally above inflation – and bad businesses got flushed out as they failed to adjust to competition and higher borrowing costs. It sounds fair, but it does not suit the objective of governments that want economic growth now, no matter the cost. So far, central banks have failed to achieve the old normal as individuals, businesses and governments are unwilling to accept higher borrowing costs and tighter credit conditions. We continue to see many companies with no earnings continue to survive because of low-cost loans. Instead of letting them fail, central banks have aided in their continued existence.
Read the rest of this article here >>march 2019
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