Are the markets ready (and, more importantly, able) to withstand higher rates? Well, with the Fed tapering another $10 bn last week to a chorus of "meh" from the markets, it certainly seems to suggest that this whole taper thing is going to trundle along harmlessly until it's been completed without disruption, but Grant Williams has a very nasty feeling about all this.
Those higher rates will not be something the Slip 'n' Fail Mutts will CHOOSE — but inflation could force them into a rather nasty corner. That must be avoided at all costs, and these people genuinely believe they can do so.
Essentially, the central bank heads all around the globe are engaged in a must-win confidence game. They HAVE to make people believe that everything is under control and getting better, BUT at the same time they must ALSO make them believe that the accommodative policies currently in place will be here, essentially, forever (forever in market-time is normally about 18 months to two years).
If the general consensus becomes that they are wrong about either of those statements (or, God forbid, both) then they — and by extension, we — are in for a world of hurt.
On the other hand, if they do manage to convince people they are right and that they will ultimately be successful, then the inflation genie will burst forth from the bottle in which it has been imprisoned as the great credit deflation runs its course; and with the massive amount of kindling heaped on the fire in the shape of QE, the conflagration will be enormous.
But just in case you were still harbouring (yes I put a u in harbouring. I'm English. That's how we roll) a misguided faith in official CPI statistics, check this out:
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Bernanke gave us ZIRP; now Draghi — damned by his own lack of earlier action — has been forced to add NIRP to the acronym lexicon of modern finance.
One central bank is fighting deflation by forcing banks to pay interest on their deposits, another is fighting the same (potential) battle by doing the exact opposite.
Think both strategies can be successful in fighting the same enemy?
Inflation whispers are EVERYWHERE right now, and those whispers are all it may take to fuel expectations of future rate hikes — and THAT is the road to perdition.
The Slip 'n' Fail Mutts know that.
In reality, it's not about Zero Interest Rate Policy or, for that matter, Negative Interest Rate Policy.
It's about Broken Interest Rate Policy.
BIRP!
Full Grant Williams Letter here...
