Julian, we are watching the markets all the time, of course, to see particularly
how the equity markets are reacting to what they think the Fed's going to do.
We had pretty robust economic numbers in the United States this week, but at the
same time, we aren't focused quite as much on the quantitative tightening
part. There's a lot of concern about
liquidity. You have some interesting thoughts on
liquidity. Well, that's two points I want to make.
Firstly, that people in the markets are unsurprisingly very obsessed with what
the Fed is doing. Every time Jay Powell costs, investors
go mad. And they're also very, very focused on
the American data, on inflation and growth, which again, is totally
understandable. But if you look more broadly right now,
there's potentially two things are missing.
One is the fact that actually what's happening at other central banks outside
the Fed matters enormously because quite apart from what the ECB is doing.
You've got the People's Bank of China, which has been engaged in the recent
months on something of a massive support program.
And you've got the Bank of Japan that's about to get a new governor, which still
appears to be taking a very dovish stance,
and that is effectively putting more liquidity into markets.
In fact, I was looking at some great research from Matt King at Citi earlier
today, which says if you look at the PBS C and the BMJ together, they've added
almost a trillion dollars of liquidity to the markets since last October.
And the reason that matters is that I am one of those people who believes that
what's happening to asset prices is not driven just by the latest data on CPI,
but liquidity and how much money is swirling around the system.
One question is, will they continue? Obviously, as you just mentioned, we
have a way to sign now coming in to replace cortisone.
And there are some who think maybe that means the end of yield curve control.
Well, it's a very uncertain question. And I would implore anybody in America
is just watch is fed to widen your gaze and look across the Bank of Japan.
And not just because I used to live in Japan and I've seen a lot of time inside
the halls of the Bank of Japan. But because we simply don't know for
sure where the is going to do going forward.
And the reason it matters is the Bank of Japan until now has been quietly engaged
in extraordinary monetary policy experiments in many ways.
They actually were a preview of what the rest of the Western world did because
the Bank of Japan started QE a lot longer than everybody else.
And there's a line of thinking, it says. Where does that has historically been
very dovish. The signals he gave earlier were that he
intends to continue the support because although Japan no longer has deflation,
it's certainly not got significant inflation yet.
And if the Bank of Japan keeps pumping out money into the markets, then what
that means for American investors or other global investors, is it what the
Fed is doing in terms of trying to contract the supply liquidity Kutty?
It's been partly offset by what's happening in Asia.
Well, I would say I had not focused on this infusion of more liquidity into the
global markets. Is it possible that's in part what is
supporting the equity markets, which have been doing pretty well so far this
year as a practical matter? On the other hand, what does it say
about possible inflation because you have more dollars, yen, euros chasing
the same goods, that's inflation. Well, there is a lot of people out there
right now who say, well, actually, what's happened in the equity market is
all down to the real economy data and certainly it matters importantly.
But I do think the fact that QE T is being partly offset by a continued coup
in Asia is one factor playing into it. I mean, just going back to the charts
the city put together, you can see very clearly that if you look at what's
happening with the Fed and to a degree the ECB is going down.
But then if you look at the Asian pattern, there's been going up.
Now, whether we're to sign at the Bank of Japan carries on in this dance is
actually unclear at the moment because he's given some fairly contradictory
signals in recent days. And, you know, the scale of the Bank of
Japan's experiments are absolutely stunning.
And there are a lot of people inside the Japanese system who are quite concerned
about the future implications of this. I mean, one of the tiny vignettes from
my time in Japan back in 1998 was being taken down a corridor in the Bank of
Japan and seeing portraits of the former governor.
And someone pointing out to me that some of them had been assassinated in the
interwar years because they'd see were perceived to messed up financial
policies. You know, I mean, I could not and
obviously that was a very long time ago. But Japan, unlike a lot of Western
countries, has a folk memory of what can go wrong when monetary policy spins out
of control. It's a bit like the Germans today who
still recall what happened with hyperinflation.
And so there is a certain degree of nervousness inside Japan about the way
policy has been going. So don't rule out a policy shift and
don't ignore the fact that that could impact global markets.
Joe, let me add one other potential complication, and that's the debt
ceiling crisis that is not too strong a word.
Crises looming in the United States, you know so well, there's a lot of concern
about what the Fed might be doing with liquidity here because of the debt
crisis really comes on as this summer, we in have some challenges.
How does that play against the liquidity issue?
Well, that's a critical issue. And that I wrote a column about that
recently pointing out that there's never a great moment to have a debt crisis,
but it's a particularly bad moment when you are embarked on this astonishing
monetary policy experiment called quantitative tightening or attempted
quantitative tightening, because the scale of what the Fed is trying to do in
terms of shrinking the balance sheet. Leaving aside the issue of what the bank
Bank of Japan is doing, the scale of what the Fed's doing is really very
significant. And one of the things that concerns me
is that we know the treasuries market is actually quite fragile in terms of its
underlying structure. The reasons are a bit complex and too
complex to go into, but it's to do with the fact they don't really have market
makers in the system anymore. Keeping markets stable in a crunch.
We saw what that means in March 2020. During the early days, a Covid when the
Treasury markets came really close to seizing up completely.
We've had other mini flash crashes and worrying periods as well.
And if we have a debt ceiling crisis, coupled with the fact that essentially
the Fed is trying to stop buying government bonds and we don't yet know
who's going to buy them, instead, you've got the makings of if not a new crisis,
then certainly a lot of risks.