Independent Strategy

The Big ‘Un

As inflation rises global capital will be repriced.  The process will start in the US, though the UK may be a precursor on a more minor scale.  The Fed or markets can drive it — the latter being worse for financial assets.  The impact will be widespread because of the dominant role of the US dollar in funding global debt.  The euro will become a funding currency for the global carry trade as the ECB will increases its balance sheet as the Fed shrinks its own. Abenomics will fail.  The BoJ will have to ride to the rescue as the cyclical recovery turns out to be a blip and debt sustainability moves to the centre of the radar screen.  Equity markets would suffer more if US capital repricing is done by markets reacting to the Fed being behind the curve.  There is a further dimension of equity risk on top of the repricing of all financial assets. A mainstay of US equity markets is corporations buying back their own shares with borrowed money.  The bond market bubble is directly linked to the equity one.  That vulnerability was largely absent in previous periods of capital repricing.  The problem is US centric.  But it’s hard to imagine equity optimism not being hit worldwide.

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