The ‘monetary morphine’ pumped into the economy to stave off depressions has inadvertently created leverage growth eerily similar to that seen in 2007, according to TCW’s Tad Rivelle.
Rivelle, who is chief investment officer for fixed income at the US asset manager and oversees $150 billion in assets, made the comments in a market update called ‘Twilight of the central bankers’.
He said the ‘fixation’ on credit growth has led to a system-wide expansion in leverage ratios and this credit inflation has caused resources to be diverted away from its best uses and towards those who least need it.
‘The result? Leverage goes up faster than the income available to service it. As such, the credit-fuelled expansion inevitably comes to a bad end. We’ve lived this story before: indeed, while every cycle is distinctly different, they all end up suffering from the same central banker induced maladies.’
Rivelle said there are considerable similarities in terms of where the market is today compared with where it was in 2007. ‘It’s back to the future – again. Leverage has returned, most notably in the corporate sector where debt metrics have not just round-tripped but indeed are now in excess of the levels experienced before the Great Recession.’
The fact the Federal Reserve continues to highlight the ‘data dependency’ of its moves, Rivelle said this reveals its policy as a ‘put on financial prices’.
‘But can the Fed, Canute-like, hold back the future tides of de-leveraging? No, though we expect that they, like their comrades in arms at the ECB and BOJ, will keep trying. Indeed, negative rates can be best understood as merely the latest attempt to forestall the failures of policies past.
‘But, is anyone helped by establishing negative “hurdle” rates to incentivise “investment?” If a commitment of capital requires a negative opportunity cost, then whatever activity that might be launched will assuredly be productivity destroying.
‘Negative rates have all the economic “logic” of destroying the village so as to rebuild it. It is monetary madness and while it might hold back the flood for a time, it fairly well guarantees that when the flood comes, it will be worse than it would otherwise.’
Rivelle said the Federal Reserve is, in fact, creating new problems as part of its efforts to address existing ones. Therefore, he said, it was best advised to invest in assets which he deemed ‘bendable’ but won’t break when the market unwinds.