We've had stock bubbles, high-tech bubbles and a real estate bubble. We believed central banks could solve all our problems. But now that last great bubble — faith in central banks — is bursting.
That's what Michael Gayed, chief investment strategist at Pension Partners, argues in an article for MarketWatch
"Twenty years ago, I'm fairly sure people said 'don't fight the Bank of Japan.' Two months ago, you could have said 'don't fight the European Central Bank,'" Gayed states. "Now, with the Federal Reserve ending quantitative easing as worldwide economic data falters, it appears the time to 'fight the Fed' has come."
Conventional wisdom holds that stock markets collapsed because the Ebola virus scare and stagnant growth in Europe. But this, he says, is not a typical correction.
"Something fundamental has changed in the market's perception," he says, stressing the stocks have fallen and inflation expectations have collapsed even in the face of trillions of dollars of central bank stimulus. "So, what happens if my belief is right that the last great bubble is bursting? It likely means a significant reset could soon occur unless reflation hope kicks in with gusto. Hard to imagine."
Economic growth and a bull market coincide with rising inflation expectations. Yet central banks have been unable to prevent disinflation.
"Fight the Fed? You sure they are going to get that inflation target when the market itself is screaming they won't, at the same time quantitative easing is ending?"
The Treasury Inflation Protected Securities (TIPS) market does indeed suggest that disinflation, which can smother economic growth, may be looming, Reuters
reports. Investors have been unloading TIPS, which provide protection against inflation, in recent months, due slowing global economic growth, most notably in Europe, as well as falling oil prices and a strong dollar.
The Consumer Price Index (CPI) dropped unexpectedly last month, setting off disinflation alarm bells and causing TIPS breakevens, which indicate inflation expectations, to sink.
"The CPI definitely set the tone. The stronger dollar and weaker energy prices are definitely having a major impact," Martin Hegarty, co-head of inflation-linked bonds at BlackRock, tells Reuters.
Although the world economy is currently slowing, John Williams, president of the San Francisco Fed, tells Reuters
he expects the Fed to raise interest rates in mid-2015. However, it might delay a rate hike if inflation is significantly below its 2 percent target and wages remain stagnant.
"If we don't see any improvement in wages," he explains, "that would be a sign that we still have a lot of slack in the economy and we are not getting any inflationary pressure to move inflation back to 2 percent."
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