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"The Biggest Problems We Face Is That We’re All Flying Blind To A Large Degree" Warns Deutsche Bank

For everyone confused about the current state of the global financial situation, you are not alone. To help, here is DB's Jim Reid with a pretty good summary of where we all currently stand.

From DB's Jim Reid

One of the biggest problems we face is that there is no historical template for current global market conditions so we’re all flying blind to a large degree. Never before have so many of the most important countries in the world printed so much money and left base rates at near zero for so long. Also never before has the largest economy in the world tried to start a slow process of reversing said extraordinary policy. So there is no road map for this journey, only educated (hopefully) predictions.

We continue to be bullish Euro and GBP credit mostly due to the fact that the global financial system is so fragile and the global economy so lethargic and asset prices generally so high (with exceptions) that it near forces central banks into a continuation of exceptionally easy monetary conditions. So we don't think this high liquidity era is over yet. Given the recent widening, in the three main currency blocks, only EUR BBBs have been tighter (just) than current levels for more than half the time through history.

So we still think very easy money is still going to be the dominant theme in financial markets. However our FX colleagues wrote an interesting report yesterday exploring their recent QT (quantitative tightening) theme. They think 2015 will mark the peak in global FX reserve accumulation following two decades of 'unremitting growth'. This is due to three cyclical drivers: China’s economic slowdown, impending US monetary tightening, and the collapse in the oil price.

They would argue that the implications of their conclusions are profound. Central banks have accumulated 10 trillion USD of assets since the start of the century, heavily concentrated in global fixed income. Less reserve accumulation should put secular upward pressure on both global fixed income yields and the USD. There are counter forces in the opposite direction (eg European current account surpluses and QE) but they'd argue that there is a change in the secular trend.

Our thoughts are that this will require the need for ever looser policy from Western nations to offset this impact. We're also still not sure the US will be able to tighten much in this cycle given all that's going on globally.