Professional Documents
Culture Documents
• The big risk is that a shock occurs that policymakers cannot offset …
• … either because inflation is above target and prevents a response …
• … or because the shock is so big that the tools are inadequate
Our bottom line for asset markets is that definitively rising inflation or wage growth
would be the beginning of the end of this rally. We see disinflationary forces as
structural and persistent, so do not see a quick end to the rally as inevitable. Even if
central banks talk the talk of normalizing, as long as inflation is not clearly headed to
target, they will not risk withdrawing stimulus at a pace that endangers activity or asset
markets. However, getting to inflation targets will result in higher implied and realized
volatility and much more unstable markets. So be careful what you wish for.
The first section below discusses the pivotal role that low inflation has played in making
the extended recovery and asset market robustness possible, the second part discusses
structural forces that make monetary more effective at stimulating asset prices than
activity, and the final sections discuss how it can go wrong.
Why has everything gone right in asset markets?
Imagine you are in a world where inflationary pressures are minimal, unemployment
keeps falling and the business cycle runs longer than anyone expected, all while central
banks keep rates lower for longer. The question is not ‘what can go wrong?’ but ‘what
can go wrong that policymakers won’t respond to?’. Provided you are certain that
policymakers will act in response to a negative shock -- cutting rates, delaying raising
1
Rafiki Capital Management (Hong Kong) Limited
2001 Kinwick Centre, 32 Hollywood Road, Central, Hong Kong
Email: ir@rafiki-capital.com
Tel: +852 3163 8100
Website: www.rafiki-capital.com
1
I think low nominal investment is driven by technological factors, so do not think that is inadequate.
3
Rafiki Capital Management (Hong Kong) Limited
2001 Kinwick Centre, 32 Hollywood Road, Central, Hong Kong
Email: ir@rafiki-capital.com
Tel: +852 3163 8100
Website: www.rafiki-capital.com
4
Rafiki Capital Management (Hong Kong) Limited
2001 Kinwick Centre, 32 Hollywood Road, Central, Hong Kong
Email: ir@rafiki-capital.com
Tel: +852 3163 8100
Website: www.rafiki-capital.com
3
The answer is that demand will exceed production, so we will become increasingly indebted. However, right now
there is no sign that anyone would care, so it is an empirical question whether initially the spending outweighs any
risk premium from the higher indebtedness. It is not a policy recommendation but an observation that you can get
perverse effects in a low capital, demographically skewed economy.
5
Rafiki Capital Management (Hong Kong) Limited
2001 Kinwick Centre, 32 Hollywood Road, Central, Hong Kong
Email: ir@rafiki-capital.com
Tel: +852 3163 8100
Website: www.rafiki-capital.com
4
In a different world, I once contributed to rehabilitating the Phillips curve: Englander, Steven A., and Cornelis A.
Los. 1983. “The Stability of the Phillips Curve and Its Implications for the 1980s.” Federal Reserve Bank of New York
Research Paper no. 8303, February. Then the issue was whether a modest recovery would generate immediate
inflationary pressures.
7
Rafiki Capital Management (Hong Kong) Limited
2001 Kinwick Centre, 32 Hollywood Road, Central, Hong Kong
Email: ir@rafiki-capital.com
Tel: +852 3163 8100
Website: www.rafiki-capital.com
Steven Englander
Head of Research and Strategy
Rafiki Capital
Steven.Englander@rafiki-capital.com
8
Rafiki Capital Management (Hong Kong) Limited
2001 Kinwick Centre, 32 Hollywood Road, Central, Hong Kong
Email: ir@rafiki-capital.com
Tel: +852 3163 8100
Website: www.rafiki-capital.com
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