Bubble warnings are ringing louder after a week of moderate central bank bombs that fueled the most favorable financial conditions in nearly four decades.
BlackRock’s Rick Rieder and Allianz’s Mohamed El-Erian are among those warning that systemic risks will only multiply unless monetary officials take more decisive action to reduce extraordinary pandemic stimuli. While policy-makers are well aware of the dangers in the age of easy money, their accommodative stances are encouraging ever greater flows to riskier markets.
The crypto industry just hit more than $ US3 trillion ($ 4 trillion) in value, the largest exchange-traded junk bond fund is booming after raising the most cash since March, and major Stock indices are close to the records. It’s no wonder that a cross-asset indicator shows the easy investment climate in the US is one of the history books.
The risk binge is intensifying concerns about market foam and lax central bank controls. The world’s largest, the Federal Reserve, last week signaled a delay in interest rate hikes until the job market is in better shape after announcing a widely expected reduction in asset purchases.
“The risk is that it is creating overheated prices,” Rieder, CIO of global fixed income at BlackRock, told Bloomberg TV on Friday. “The risk for the system is that you get too much liquidity in the system, which generates an excess.”
Last week, the Bank of England surprised markets with the decision not to raise rates. Meanwhile, the president of the European Central Bank, Christine Lagarde, rejected bets on a rate hike in 2022.
With supply-side pressures threatening growth, central bankers run the risk of acting too fast and derailing recoveries or being too slow and letting inflation spiral out of control. Therefore, officials are taking a measured approach, despite some investors pushing for a more decisive end to the pandemic stimulus.
“It is not clear to me why we have to continue pursuing such an active monetary policy,” El-Erian, a Bloomberg opinion columnist, said on Bloomberg TV on Friday. “The economy is good. But the collateral damage it is creating, the resulting unintended consequences, is spreading. This is a Fed that is going to wait and I’m afraid it will be left behind and we risk making a pretty big policy mistake. ”
Catherine Mann, a Bank of England policymaker who voted to keep rates on hold, sounded a cautious note in the meeting minutes. She was seen as the former Citigroup economist urging an early halt to asset purchases, saying he was driving a “high level of risky asset prices.”
Investors may be doubling the risk, but at least they are building a protective cushion.
According to Bank of America’s latest monthly survey of fund managers, cash allocations increased to a net overweight of 27 percent, the highest since July 2020, while institutional traders are hedging in the derivatives market of Actions. And with corporate earnings beating expectations, there are good reasons for the rallies in credit and equities in the United States and Europe.
At the same time, while lawmakers have been slow to close the liquidity hose, they are at least getting started, Rieder said.
“Could you do it a little faster? Yes, I think so, ”she said. “But at least the door is open and we are moving in the right direction.”
Kristina Hooper is among those who downplay a market defeat scenario of any moderation in growth and tighter monetary policy, though she sees a cap on the rally for venture stocks like cyclicals and small caps. . “We are in a transition to a more normal economy.” Hooper told Bloomberg Radio. “That, to me, is the theme for 2022. And that suggests we will see moderate growth and defense and large caps will perform better.”