Global Dovishness Spurs Growth, But Has Consequences

Global Dove

Let’s look at the state of the global central banks. As you can see from the chart below, most central banks’ last action was to cut rates. That’s likely because in 2015-2016 the global economy was very weak as evidenced by the decline in trade. Trade has rebounded despite the risk of protectionism. Recently, President Trump said he would probably have America exit NAFTA. We’ll see if he does that. What it is replaced with will determine how it affects trade. President Trump’s stance is very strong against free trade, but his policies and the deals he makes made don’t seem to always reflect that stance. If the stock market believed the President was against free trade, it would selloff in response to the anti NAFTA statement. The stock market sees that the global central banks loosening financial conditions has led to a growth rebound which is why it is near its all-time high. The scary part is the 6th column which shows central banks’ real interest rates. I like to look at this as a rough version of the Taylor Rule since we don’t have that for each economy.

As you can see, most of the world has negative real rates. Even America, which has rising rates, doesn’t have positive real rates. Every developed economy has negative real rates. That distorts the economy as the financial system is valuing high risk investments higher than normal. When rates rise, these high-risk investments which are getting bid up will collapse. Some would say the cryptocurrency space is driven by the desire for returns. The low yield environment has driven some investors into ICOs which don’t have real businesses. There are some instances where businesses raise capital through issuing their own currency which can buy content on their platform which doesn’t exist yet. It’s like buying tokens for a Dave and Busters which will be built in 2 years. The speculation has gotten absurd.