From The Pragmatic Capitalist:
JP Morgan was out with an excellent piece of research explaining (and defending) their opinions on many of the market myths that are currently swirling regarding the government’s response to the crisis and the reaction by various asset classes. Is the Fed blowing bubbles? Aren’t we repeating the problems of our past? JP Morgan explains:
- What is asset reflation? It is the broad rally in all major asset classes—bonds, equities, and alternatives.
- What drives it? A record low return on cash and falling uncertainty and volatility are inducing investors to flee into any asset that promises positive returns. We do not need economic data to surprise on the upside. It is enough and even better if data merely come out as expected.
- What assets gain most? The higher the yield and risk on the asset, the higher the return from asset reflation.
- What will upset it? Uncertainty from either renewed downside risks on the economy, or sudden rises in inflation risks that require premature rate hikes. Several central banks have started hiking rates and will be joined by others in coming months. Will that not upset the asset reflation trade? No offense, but it is only the monetary policy rates of the biggest central banks that matter here.
- And what about major central banks starting the normalization process by removing excess liquidity and reserves or the unwinding of money market support measures? By our thinking, it is the price of money, rather than its quantity, that matters most. Hence, mopping up excess reserves without pushing up money rates should not impede asset reflation....MORE