We live in a world where Turkey, being considered for membership in the European Union, brazenly dismisses 60,000 civil servants in what an EU official renewing their application described in terms of a planned cleansing. Contrast this with quantitative stimulus being considered by a central banker to be “building up financial imbalances without material benefit” and you have another notable update from Eric Peters, Chief Investment Officer at One River Asset Management.
Peters in the past has highlighted issues before they were mainstream
Peters various updates have, in a scatter-shot way, provided a glimpse of a dichotomous world increasingly in turmoil. In October of 2015, for instance, when the predominate establishment thought found any questioning of unchecked migration from Syria and the Middle East impolite and unvarnished, Peters noted the growing concern in Sweden. It had nothing to do with race and much more with logic. These observations paved the way for the Brexit vote and are now a major issue in society.
In June 2015, just before the August stock market value readjustment, he wrote about the difficulty of the Fed raising interest rates. At the time the lightly discussed potential potential for a Fed rate hike to derail the stock market was a topic that was hotly discussed among certain fund managers but mostly out of the public eye. Peters also noted odd market environments and warned about protecting portfolios — mostly topics out of the mainstream discussion and before their time.
His most recent comments, while scatter shot in delivery, nonetheless present a cohesive look at a world in disarray.
With stock and bond markets rallying after Brexit, and Europe stable, why the emergency central bank policy?
“I do one thing really well,” Peters wrote, quoting an unnamed CIO. “I am really good at identifying things that in 60-90 days will appear to have been patently absurd”, Peters notes in his latest highly followed weekly email.
Perhaps it is with this notion that Peters looks at historic central bank quantitative simulative efforts.
With stock and bond markets rallying in the aftermath of Brexit, and the Euro stable, there’s no European crisis to justify more radical action. Just an uneasy feeling. Because no one knows whether the accumulation of all this extraordinary stimulus is solving our problems, or simply staving off a crisis that will reappear soon after we stop.
Why is there such an emphasis on thought bending economics such as negative interest rates when there is no real threat? To illustrate this point, Peters turns to a central bank conversation.
“I don’t believe that monetary stimulus has become ineffective, and I do think that if we tightened, it would slow the economy,” a central banker told Peters. “But the BIS argue that we shouldn’t have stimulus this high because all we’re doing is building up financial imbalances without material benefit.”
The key issue central bankers are seldom asked — can they succinctly describe the risks of quantitative market manipulation — is thin ice that Peters recognizes as important to warn against. Stimulus has been largely viewed in the mainstream without consideration of systemic market risk.
“What if… our emergency policy settings frighten corporate leaders, making them risk-averse?” asked the central banker in Peter’s conversation. “What if consumers are saving the energy-price windfall for this same reason?”
Perhaps the most interesting question centers around the unintended consequences and systematic stimulus has induced. “I’ve started asking myself whether what is optimal for an individual is not optimal for an economy?” the central banker mused to Peters.
“You know, if you go back to micro-economics, very low rates can lead to less risk taking.”
Such thoughts of the unintended consequences of quantitative stimulus along with the lack of serious questioning leads Peters to a practical conclusion:
And with so much of this new money leaking to America and emerging markets, it’s not just a question for Europe and Japan. Which leaves investors facing a dilemma all their own: In a world awash in stimulus, how should you invest in the absence of a crisis?
In related news, Raymond Nolte, the chief investment officer of SkyBridge Capital, told Bloomberg Brief he has zero exposure to Japan-focused hedge funds because “unprecedented monetary stimulus has made the nation’s debt and equity markets too distorted to manage,” the report said.
Peters may have once again asked the little discussed questions that could turn out to matter most in the future.