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January 21st, 2018 by Charlie Bilello
Every major developed country central bank in the world is maintaining negative real interest rates in what is now the 9th year of a global economic expansion.
Source: Investing.com and Pension Partners, as of January 12, 2018. Real interest rates = nominal interest rates minus the inflation rate (CPI = consumer price index).
Why are central banks continuing to behave as though we are in the midst of an economic crisis?
If you believe their rhetoric, it is mainly due to fears of “deflation.” But rhetoric does not equal reality in this case. As one can readily see in the above table, CPI increases are positive, not negative, in all countries maintaining easy money policies.
Which brings us to the title of this post.
Under the guise of deflation, central banks were aggressively easy when Crude Oil declined over 70% from mid-2014 through early 2016.
Source: Stockcharts.com and Pension Partners. Date Range: June 13, 2014 – February 11, 2016.
Over that time, inflation expectations (as measured by 10-year breakeven inflation rate), plummeted. The European Central Bank (ECB) and Bank of Japan (BOJ) pushed rates into negative territory, and have maintained those policies ever since.
Source: FRED and Pension Partners. Date Range: June 13, 2014 – February 11, 2016.
This is interesting because Crude Oil has since rallied over 135%.
Source: Stockcharts.com and Pension Partners. Date Range: February 11, 2016 – January 12, 2018..
And inflation expectations are quietly moving back up.
Source: FRED and Pension Partners. Date Range: February 11, 2016 – January 17, 2018.
Will this evidence of reflation bring an end to the longest period of easy money in history?
We’ll only know in hindsight, but it’s a disconnect becoming more glaring by the day. How much longer will global central banks maintain crisis-era policies when there is no such crisis? This will be one of the key questions for markets in 2018.
Charlie Bilello is the Director of Research at Pension Partners, LLC, manager of the ATAC Inflation Rotation Fund (ATACX). He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.
In 2017, Charlie was named the StockTwits Person of the Year. He is a frequent contributor to Yahoo Finance and has been interviewed on CNBC, Bloomberg, and Fox Business.
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