Fasten Your Seat Belts: ‘A Melting Pot’ Of Risks

In case you haven’t noticed, we are living in uncertain times.

Thanks to the fact that global central banks have printed more money than human beings are capable of comprehending (I mean, we can show the total on a chart, but that’s about the limit in terms of our ability to conceive of it), financial assets have been inoculated.

CBs

When stripped down to its simplest possible form, the transmission mechanism to financial markets is remarkably straightforward: policymakers engineer a shortage of purchasable securities and that effort starts with driving yields on the safest of assets to punitive levels. So this works on both the supply and the demand side. You reduce supply by buying up assets, and in the process, you create demand by engineering a hunt for yield. In some cases, the net supply of securities becomes negative.

The great question of our time (or at least for market participants) is whether that powerful technical can withstand epochal political shifts. So far, political earthquakes “the likes of which the world has never seen” (to use a Trumpism) have been overwhelmed by central bank liquidity.

This week, we might have seen the first sign that central banks have reached a limit in terms of their ability to offset geopolitical/policy uncertainty.

That’s the context for the excerpts you’ll read below from a new BofAML note entitled “Separating Political News From Noise.”

Via BofAML

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