Stanley Druckenmiller is one of the largest investors / traders in the last 40 years. He secured money for George Soros from 1988 to 2000 and played a major role in the exchange that broke the Bank of England (it was considered $ 1 billion in 1992 when the UK left the exchange rate mechanism at the time). He was interviewed several times and when he talked about his investment style, it is clear that one of the most important macroeconomic factors to understand is the behavior of central banks. In other words, when central banks relax monetary policy, financial assets tend to increase in value, and when policies tighten, financial markets tend to struggle, perhaps undergoing a bear market.
We also try to understand what actions central banks are going to take and how they can affect financial markets. We have to say what central banks say and they seem to be different in the post-PSC period, and what they should do (in our view) and what they end up doing may be completely different. We had to deal with what British politician Pat McFadden called “unreliable boyfriend.”
In June 2014, after a series of conflicting signals about possible increases in bank rates in England, McFadden compared the Bank of England’s behavior to that of an unreliable boyfriend. At that time, bank governor Mark Carney was discussing a potential rate hike and, although the timing was fluid, it would be “pushed by the data.” More than three years later (and another set of measures of quantitative easing and a reduction of rates a year ago), the Bank raised interest rates again. Should we take this as a reliable signal that the bank eventually shifted to a tightening of monetary policy? We assume that we still depend on the data; we do not know whether it is economic data or financial market data.
When we step back, we must first admit that we are surprised to see how quiet the financial markets have been because the Fed has tightened its policy and promised to do more. However, we continue to believe that the global stimulus will rise more and more in the coming quarters and that at some point this will have a profound impact on the economy and the financial markets. Not only have we had rate increases from the US Federal Reserve. UU. And the Bank of Canada and now perhaps the Bank of England, but the amount of the global EQ will be reduced considerably in the coming months. The following table (Courtesy of Citi) shows the EQ level of the main central banks. As you can see, the monthly EQ is already declining and is expected to drop to a monthly total of zero by the end of 2018.
As the Fed lowered its equalization in 2014, the ECB took the lead by moving the global EQ from around $ 150 per month in 2013 to half that level in early 2015 to about $ 150 billion per month. After a few months in August 2015 and January 2016 in China, it now seems clear that $ 150 billion per month of global EQ combined with very low interest rates (even negative in Europe and Japan) and strong China’s stimulus is sufficient to reinvigorate global equities (and other risk assets), as shown in Chart 2.