11 to 17 July: Stress Relief

There has been a dramatic change in tone in a few short weeks, from double digit one-day falls in European equities prompted by Brexit and Italian Banks, to a year to date low on the VIX “fear gauge”. We think this is revealing. Policy has been unable to address the real, long-term challenges faced by developed markets – instead supporting just enough growth to keep markets on an even keel. As such, investors have low conviction in their portfolios and, with historical correlations and relative risk/return dynamics turned on their heads, are particularly sensitive to market shocks.

Given even long-term bonds are now near 0% yield, we think an important policy evolution is close. That is to say, central bank’s will need to do something new to generate a meaningful economic reaction. After a visit by Ben Bernanke, this week talk surrounded Japan and the possibility of Helicopter money (n.b. Bernanke’s blog series has also suggested the possibility of negative rates and targeting longer interest rates as additional tools for the FED. Other economists have discussed higher inflation targets and nominal GDP targeting).

For all the positive rhetoric around “helicopter” dropping newly printed money, it surely brings risks to credibility. Indeed, we remain of the view that there is no stimulus package able to generate sufficient real growth to address the developed world’s ills.

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