By Eric Peters, CIO of One River Asset Management
“To prepare for the future, we must first reimagine the past in a manner that central banks won’t,” said the CIO.
“So, what is it that central banks can’t imagine?” he asked, rhetorically.
“Can they imagine being both right and wrong? Right that the inflation potential of the system is low due to the persistence of deflationary forces that are now well known, but wrong because their actions - based on this belief in deflationary tendencies - unnerves depositors sufficiently that they want to get out of the currency,” he said, the S&P 500 still within a few percent of record highs, home prices surging, used car prices too.
“And can central banks also imagine technology being both deflationary and inflationary?” he asked.
“Deflationary for all the obvious reasons - just ask the shoeshine about artificial intelligence and productivity – and inflationary because social media can amplify inflationary fears, while financial technology enables more and more depositors to switch out of dollars at the tap of a button,” he explained, countless buy and sell orders from a whole new generation of day traders, addicted to Robinhood, swirling in the cloud.
“It could be the currency equivalent of a bank run in the 19th century when the mere rumor - true or false - of a bank losing its gold reserves, could set off a run,” he said, a student of the rich history of financial booms, busts, panics.
“So, can these two paradoxes combine to take out a reserve currency?” he asked, concerned less by the immediate market risks, but rather, what happens when the next big equity market decline forces the Fed to ease policy while inflation remains robust.
“Perhaps this will be how our story ends. A run on the dollar takes hold, the world’s reserve currency collapses,” he said.
“It’s the explosive ending central bankers can’t imagine.”