While most sellside “research” has traditionally been complete garbage, either meant to boost soft dollar revenues and build client goodwill by giving one-on-one “expert network” meetings with management, or a macro echo chamber of equity strategists all of whom are terrified to stray from the penguin, or is it lemming, flock (its only utility is to give insight into whatever the prevailing groupthink consensus is, allowing an easy opportunity to fade it) and desperate to be as optimistic as possible (there is little upside on Wall Street to be a pessimist or a realist) there are the occasional voices of profoundly insightful, “variant perception” views from within the big banks, almost exclusively from the credit, and rarely if ever equity, division. Names such as BofA’s Michael Hartnett, DB’s Jim Reid and Dominic Konstam, and of course, Citigroup’s Matt King.
What makes these analysts unique is that they tell the truth as they see it, unpleasant as it may be (some reading between the lines may be required) even if it means breaching protocol and launching internal scandals over “client communication objectives.” Two weeks ago, Dominic Konstam predicted, accurately, that the Fed’s rate hike will be tantamount to policy error (as we showed by the market’s response on Thursday and Friday). Then, taking it a step further, last Thursday we showed Hartnett’s presentation how the Fed’s rate hike has unleashed the next bear market.
Now, it’s Matt King’s turn, to explain wny the “risk is that central banks have now created a monster such that markets drive the economy, if not on the way up, then certainly on the way down.“
From “Positive feedback loops” by Matt King
The broader narrative – in which central bank liquidity has pushed up asset prices without fostering a similar improvement in the underlying economy – is one we find the vast majority of [fixed income] investors are sympathetic to. The only question is on the timing: no one wants to get out too early.
This is one of the reasons we find the outlook for next year so difficult, and why there is so little agreement about it (even internally at Citi, never mind across the street). It depends less on fundamentals, and more on second-guessing what everyone else will do. Of course, markets are always to some extent like that, but self-reinforcing processes seem to have grown in importance in recent years. Rather than the economy driving markets, as is supposed to be the case, the risk is that central banks have now created a monster such that markets drive the economy, if not on the way up, then certainly on the way down.
Suppose, for example, that all does not go according to plan, and that the current squeeze higher in markets fades and even reverses. Perhaps oil price and EM weakness prove persistent, markets and the…