Page 19 - The GSE Report March-April 2018

MONETARY POLICY MJARN.U-AARPYR.20210818
However, yield curve inversion is a far-leading indicator, which is why my previous recession and bear market calls were early. Those nine recessions all began 6–24 months after the yield curve inverted. And, in the ones I’m old enough to remember, many experts spent those months telling us that this time was different. (Spoiler: It wasn’t.) And I expect the same again. (Thoughts from the Front Line, John Mauldin, 04/27/18)
There’s no free lunch for central banks’ aggressive monetary policies
Agora Financial’s Nomi Prins wrote:
The cheap-money polices that the major global central banks enacted in the wake of the 2007–08 financial crisis were no free lunch. Everything has a price. The issue is—who pays up? You can rest assured it won’t be the mega-banks. The biggest banks on Wall Street gamed the entire situation, received bailouts, inhaled cheap money, paid minimal fines and went on with business as usual.
Fabricating trillions of dollars to lavish on the banking system resulted in some unintended, or perhaps willfully ignored, consequences. Central banks deployed quantitative easing (QE) and used their newly created cash to buy bonds or ETFs.
They became the world’s largest portfolio managers. But, as this Financial Times article (paywall) notes, “According to a new poll,” respondents “strongly suspect that as the very loose monetary policy of the last decade is reversed and interest rates are allowed to rise, there is a chance they might lose rather a lot of [those assets].”
The piece refers to a “September 2011 quarterly report from the Bank of England that predicted that while quantitative easing would work on the economy in various ways, the one to which it attached ‘particular importance’ was the ‘portfolio balance channel.’”
The author considers this code for a “bubble creation channel” or “a very sharp rise in asset prices.”
When central banks created money and bought assets, the prices of those assets
rose (think stocks) and the amount of debt-oriented assets created to fill the demand increased as well. We are in a bubble world. Bubbles can do two things: grow and pop. By
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