Still Hakuna Matata?

If “missing” inflation is the bane of central bankers’ existence in the post-crisis world, it’s simultaneously the best thing that ever happened to risk assets.

Investors are starting to figure out that the best of all possible worlds these days is decent or even robust incoming growth data against a backdrop of still subdued inflation. It’s a “have-your-cake-and-eat-it-too” type of deal. You get to claim that the case for staying long risk is supported by the “synchronized” recovery in global growth, while citing below-target inflation as the reason why central banks aren’t likely to spoil the party by pulling the proverbial punch bowl away.

By relying on antiquated models and targets that are so narrowly construed as to be almost meaningless, policymakers have given themselves an excuse to keep easing. Indeed, as we saw with the Riksbank on Thursday, even if inflation surprises to the upside, you are effectively forced to pretend like ultra-accommodative policies are still necessary to “sustain” the uptick because if you claim victory in a world where everyone else is still easing, your currency will appreciate rapidly on the perception you’re set to tighten, thus reversing the gains in inflation and putting you right back where you started.

The ultimate irony in all of this is that in their never-ending quest to “find” inflation that’s supposedly “missing” from the real economy, policymakers are creating all kinds of inflation in financial assets. That creates the conditions for a painful correction which, when it finally comes, will be promptly trotted out as an excuse to go right back to easing.

So you know, how we ever escape this loop of absurdity is anyone’s guess.

Perhaps the most amusing thing about it all is that it’s become so ubiquitous and reliable that it can now be summarized succinctly in the form of a bullet point (and apparently “bulletproof”) investment thesis. Here’s Barclays doing just that in a new presentation aptly entitled “Still Hakuna Matata”.