Rights,Wrongs &Returns:Year of Living dangerously

The first quarter has thus far lived up to our description of 2016 as a Year of Living dangerously (Nov’15). What will the next 12 months hold in store?

We continue to expect return of disruptive volatilities driven by unpredictable public policy cross-currents. As the private sector refuses to multiply money and CBs engage in more extreme and unpredictable policies, the net outcome is likely to be the re-emergence of powerful volatilities; low/declining trading volumes and perpetuation of current low investor conviction levels.

We maintain this largely precludes ‘normalization of monetary policy’. Given current levels of leverage/overcapacity and deep productivity retarding secular shifts, any normalization is socially unacceptable. A far more likely outcome is creeping nationalization of capital markets. As remaining free market signals degrade, the public sector will have little choice but to eventually direct allocation of credit via mix of fiscal & monetary policies, such as consumption supports and public sector sponsored capital formation, with Japan arguably in the vanguard. We maintain that investors, CBs and the public sector will unequivocally cross this Rubicon in the next 12-18mths. The objective will be for public sector to replace non-multiplying private sector and resolve the Mexican stand-off where the public sector feels it is being held hostage by the market.