Fed vs BoJ: Who’s bigger?: J.P. Morgan View (video)
http://reut.rs/1vCjDL4
Now that interest rates in many developed countries are near zero, and the powerful cycle of deleveraging a global economy grabs the daily headlines, many private and public sector participants are quickly becoming economic historians, seeking examples of prior deleveragings for potential answers to probable outcomes. The international consulting firm McKinsey & Company has identified 45 episodes of deleveragings around the globe in modern history, providing enough data points to assist in extrapolating potential outcomes for the “great experiment” that many central banking systems have embarked upon. However, unlike the prior 45 episodes, the scale of the current deleveraging cycle is unprecedented, as the developed world works off record levels of debt and deficits.
For investors, the challenges of navigating a multi year deleveraging process will take extra-ordinary time, talent, and strategies. The era of buy-and-hold is long past (ended in 1999), as the era of buy-and-manage is likely to continue for the duration of the unwinding an over leveraged global economy. Opportunities and challenges will likely present themselves fairly often, as the balancing act of deflationary pressures from austerity, write downs, and defaults are countered with inflationary pressures of the printing of money.
Policy makers are challenged with getting the mix right with limited experience and a limited framework of reference. If they don’t go through the proper calculations of how much fiscal and monetary policy is required on a global scale, then it is sure to be a bumpy ride. Historically, there have been “ugly” and “beautiful” deleveragings. When the deflationary and inflationary pressures are managed prudently, and the right mix of each component is applied to keep the scale in balance, a beautiful deleveraging can prevail.
Investment strategies adept at managing risk, without sacrificing long-term returns will be necessary to navigate the choppy waters of ANY deleveraging cycle. The multi speeds of a slower growth global economy coupled with the re-flationary efforts of central bankers set the stage for an exciting investment climate. A climate where institutional and retail investors are “strongly encouraged” to take an increased level of risk as the financially repressive policy of near zero interest rates has the effect of artificially inflating asset values. Central bankers seek to reflate asset values, through the waves of liquidity and quantitative easings. In a world of slower growth, it is important to ride the waves of liquidity and to capture returns when they present themselves. At the same time, it is equally important to protect prior gains from the destructive nature of volatility, as the flow of information increases during potential inflection points, such as the 2012 U.S. Presidential election, or the January 1st 2013 Fiscal Cliff.
To Learn More, Read The White Paper: “Prosper & Protect in a Deleveraging World – Using Managed Volatility Strategies”
Managed Volatility Blog 