There is now no question that the sole, undisputed factor driving credit and equity markets is the dollar destructive collusion between the Fed and the major global central banks. As long as the Fed is dead set on inflation, and is willing to throw trillions of free liquidity at any problematic flare up, and is happy to keep interest rates at 0%, liquidity-addicted equities will likely push higher until such time that the incremental hopium "hit" does nothing, and markets overdose, ending up not just in the critical condition reminiscent of fall 2008, but outright death. Until then, expect to see your daily dose of market buoyancy from whatever algo is currently the dominant momentum platform gunning the market ever higher, even past all disconnect with traditional correlations such as FX, credit and commodities. If the Fed wills it, so it shall be. Alas, while the Bank of England was apparently an easy target, when it comes to massive financial fraud and malfeasance, the Fed is untouchable.
The major benefit to asset managers is that they can fire their entire analyst teams: the only relevant metric to determine where stocks will trade is reading between the lines of Fed statements and following the daily dollar action tick for tick. This way even hedge funds can start reporting phenomenal EPS on collapsing revenues (shockingly, redemptions are still occurring quite aggressively throughout the entire buyside community). For a more objective quantification of the near-term benefits and long-term catastrophe of the Fed's liquidity avalanche, Bank Of America has put together several observations on the matter.
That government intervention policy has successfully mitigated the credit crisis without a clear cost [$9 trillion apparently is not clear enough for Merrill Lynch. oh well] remains the key to the recovery in risk assets and our near term bullishness. However, that strategy front loads the benefits and back loads the risks. The benefits are manifest in the rebound in capital markets, the reopening of credit markets and the substantial reduction in credit costs bolstering risky asset pricing. These benefits follow direct and indirect government intervention in financial markets. Direct intervention through the effective nationalization in case of residential mortgages, TALF and PPIP support for consumer ABS and CMBS and ZIRP (zero interest rate policy) for corporate credit all resulted in the collapse in credit costs and the expansion of credit availability as Figure 1, Figure 2, and Figure 3 nearby highlight. This repair in credit markets further supported the rebound of equity markets.
Ah the American way: 150x P/E yesterday, benefits now, credit card statement later, payments never.
The cost for such a strategy remains the long term inflationary consequence of such policies.
