The chief New York global strategist for Deutschebank, Jack Reid, warned in a public research note today that the Federal Reserve has trapped itself in a “monster global debt bubble” and will have to reverse course and “untaper”.
Taking off from the bailout by China of a company called Chinese Trust, Reid said that no debt/securities investor of even moderate size can be allowed “to default without there being market fears of its igniting panic in all financial markets…. We’ve created a global debt monster that’s now so big and so crucial to the workings of the financial system and economy that defaults have been increasingly minimised by uber-aggressive policy responses. It’s arguably too late to change course now without huge consequences. This cycle perhaps started with very easy policy after the 97/98 EM crises thus kick-starting the exponential rise in leverage across the globe.” Without realizing it, most likely, Reid is referring to what was unleashed by the elimination of the U.S. Glass-Steagall Act.
“Central banks,” Reid continues, “have little option but to keep high levels of support for markets for as far as the eye can see, and defaults will stay artificially low…. As such we remain bullish for 2014. However it’s largely because we think the authorities are trapped. The world is fixated with U.S. monetary policy and huge flows have traded off the back of QE…. We have suspicions that the Fed may have to be appreciative of the global beast they’ve helped create as the year progresses.”