The soft landing of the QE
Economists and investors around the world are now worried about the way how the bubbles will deflate. The central banks were enough good to avoid the hard crash of development countries’ economies by printing money and purchasing everything. Now we all are waiting to see how they will withdraw the cash without causing a hard burst of the bubbles.
In a normal situation there is a negative correlation between some markets. When the equity markets rise the bond prices fall. In the last five years we haven’t seen this correlation. We have bubbles in both markets. In fact this is the result of the extra money printed by the central banks. Investors have no place where to invest except in the markets. For as long as consumers don’t spend, the direct investments will be low and the only thing is to invest that extra money in the markets, every kind of market. The fact that some corporate bonds in Europe have negative yields suggest that investors are betting on a negative inflation and may be in a negative perspective for the equity market, so is better to lose less in bonds that lose more in equities. The low rates of interest are causing a bubble also in the real estate markets around Europe and very soon In the US.
Now the key demand is: how fast will the Fed rise rates and will it cause a burst of the bubbles in the markets? History tells us it was a good thing that the Fed lowered rates quickly at the beginning of the financial crisis. As fast as many investors didn’t expected that, because they didn’t know yet, how deep the crisis was. Now, can someone forecast how fast it is necessary to rise rates, without causing a hard landing of the markets and the economy? May be that a considerable correction of the markets could be healthy for the economy.
The strong dollar is giving a hand to the Fed on preventing the imported inflation to contribute to the total inflation. This can allow the Fed to rise rates slowly. The lower oil price and the drop on the commodities prices are also helping in this direction. If it was a good thing lowering interest rates fast, it could never be rising them fast. Some-times central banks are forced to rise interest rates fast, but this time seems they can take it slowly.