MONETARY POLICIES
Fed are struggling to understand the fundamental drivers of one of their policy goals (and a price target they chose t hemsel v es only a few years ago), we can’t really have faith that they really know what they are doing. Perhaps the policy error will be similar to 1999 and 2007 when they kept policy too easy for too long, and created fi n a ncia l bubbles that wreaked havoc on the real economy once they burst. Perhaps they think that asset prices are already too high and that they need to tighten more aggressively now so that when Yellen steps down early next year, she can say that she had put in place the correct normalisation policies.
Our view remains that most
market prices; bonds, credit and equities (as well as some property markets and crypto currencies)
are in varying stages of bubbles that will burst at some point. We continue to believe that the
FX
yields are turning higher, and the Dollar is showing tentative signs of improvement. If yields and the Dollar continue to rise (which we expect), and the Fed continues to tighten policy on two then at
fronts, some
point we expect a sharp increase in volatility and lower prices for pretty much everything.
Assuming a tax plan of sorts will be passed, the Fed will be tightening more than the markets are currently pricing
Fed will make a policy error, and currently our money is on them tightening policy too much until something in the financial markets breaks.
Even if we are right, the timing of these events could take a lot longer than we imagine. Equity markets continue to make new highs, but there
are now signs that bond
In fact, we think there is a strong case to be made that cross asset c or r e la t i on s become more positive, in which case diversification may not be much help to investors. Remaining fully invested today
(as many ETF investors are by the nature of the product) is a bet that the Fed, and the other major central banks, will not make a policy error
in this cycle, when
history shows that policy error is in fact to be expected.
Stewart Richardson
Chief Investment Officer RMG Wealth Management
FX TRADER MAGAZINE October - December 2017 43
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