Viktor Shvets’ Post

It is all about delta - prudent or reckless tightening? This week witnessed an avalanche of commentary and op-eds from WSJ and FT containing dire warnings: unless central banks act soon, we might be courting a far greater disaster down the road, and if we wait, the ultimate action will need to be substantially more brutal and disruptive. There were similarly ominous views expressed about a potential debasement of USD and what will happen if foreigners are no longer willing to support US issuance. Pretty much all of this commentary harps back to the age of liberal capitalism that no longer exists - efficient markets, bond vigilantes, primacy of private sector, Industrial Age capacity constraints and prescriptions about importance of free market signals. Several observations from me. 1. While policy makers believe that level of accommodation is more important than the flow, the opposite is true. It is all about delta, and it is already turning negative. 2. Global liquidity has peaked two months ago and is on a rapidly declining curve. China’s credit impulse has already turned negative while G4 public liquidity which was galloping at 55% in Feb’21, is now closer to 25%, and will halve again in the next six months. USD supply which was growing at over 20% is now down to 5%-10% and even broader money is eroding, with G4M2 down from 23% to 16%-17%, and depending how one looks at repo market, possibly lower. 3. Fiscal stimuli has already peaked while cyclical recovery is nearing the top, and is starting to recede. 4. It is likely that we have already seen the peak of both China’s PPI and US CPI. We should be worrying more about disinflation making a come back into 2022 rather than dire warnings of unhinging inflationary expectations. Hence, urging a debate regarding tapering, sterilization and tightening is not prudent but looks more like insisting on volatility inducing policy errors. The same applies to views that we are debasing USD or that foreigners will declare a strike. 1. These warnings are likely to go the same way as the angst expressed about Yen. 2. They ignore that in the modern world, if the Fed does not like the price, they simply fix it, and if they don’t like volumes, they offer more. 3. The only thing that matters these days is corralling volatilities, as consequences of failing to do so, will be truly devastating. Greenspan’s put can never be reversed, as it now constitutes the core of our financialized asset-based economies. How does it all end? It does not, as the system continues to twist and turn away from conventional and towards unconventional Information Age. In the meantime, there is a risk of volatility surges both now and in mid 2022 (as we start transiting back towards disinflation and policy makers hesitate about reversing tightening policies). One thing seems clear - buy volatility protection.