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Richard Koo on “How he see the markets now”

Nomura’s Richard Koo writes in a note …

Now time for some REALTALK from the philosopher / pseudo-economist deep inside of me:

  1. Low interest rates are (ultimately) deflationary, sustaining zombie-firms in a “liquidity-trap,” which weigh on overall economic performance while also weakening investment.  
  2. Low interest rates and QE are deflationary as you incentivize mal-investment and blow perpetual speculative-asset bubbles, which (ultimately) correct and drive deleveraging—thus the ‘balance sheet recession.’ 
  3. As there is still a lot of debt-related “scar tissue,” you can’t push credit on a string.  This then leads to quick “muscle memory” returns to a defensive posture: “If there is no return on capital, capital should not be deployed.” 
  4. Now we see the Fed “stuck on this hamster wheel” because neither markets nor the economy apparently can withstand a rising interest rate environment.

He concludes “
Long-term ‘inflation expectations’ will never truly be move higher without full-scale fiscal stimulus (or the future-state of outright ‘helicopter drops,’ shudder)…because debt, disruption and demographic forces are too strong.  #BUYBONDS and #PASSOUT”

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