Tuesday, September 27, 2016

How Much Room Left

Ray Dalio is the founder of Bridgewater Associates, the "world's largest macro hedge fund" company with US$122 billion in assets under management," according to Wikipedia. In the news lately for announcing a big layoff at his firm of around 1,200 employees, Dalio recently raised some interesting questions about a couple of central banks, the Bank of Japan and the European Central Bank, and unlike many, answered his own questions.

One of the key themes that have emerged in the past year is that, having loaded up their balance sheets with tens of trillions in various assets, central banks are "running out of road." While it is a topic extensively discussed on these pages, going all the way back to 2014, a good summary of the practical limitations on central banks comes from the following series of charts from Deutsche Bank.

The first slide looks at the bond transmission mechanism, namely that central banks have become increasingly aware of the adverse impact of low bond yields on financial sector profitability; another aspect is that European pension liabilities as a % of market cap are at a 10-year high – and above the levels they reached in 2008, when the European market cap was at half the current level. This means that absent an independent rise in inflation expectations, central banks’ attempts to push up nominal bond yields (via less QE or faster hikes) risks leading to higher real bond yields as well; the implication is that equities tend to de-rate when real bond yields rise (i.e. the discount rate increases).


Read more: zerohedge.com/news/2016-09-27/bridgewater-calculates-how-much-time-central-banks-have-left



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