Bank Executives and Hedge Fund Managers worried that if Central Banks stop supporting financial markets, their private businesses will collapse


Earlier this week, the Japanese government nominated Seiji Adachi to the board of the Bank of Japan. The news made few waves outside Japan, since Mr Adachi is little known.However, global investors should pay attention. Mr Adachi is a renowned “reflationist” who favours massive monetary expansion. So his selection suggests that after two decades of eye-poppingly loose monetary policy, the BoJ is set to double down in 2020.That is remarkable. Moreover, Japan is not alone. This week the Federal Reserve left US rates unchanged, after three cuts last year.The European Central Bank also remains set on an ultra loose course. So do most emerging market countries. Indeed, it is hard to find a central bank today with a tightening mission, other than the Swedes who raised rates from negative to zero in December.Is this good news? Many investors might shout “yes”.Most asset prices have soared recently.“Very few people expected 12 months ago that we would see the returns we have seen in the markets in 2019,” Anne Richards, head of Fidelity International at the Davos Meeting of Global Elites.In spite of this deluge of central bank petrol, recent growth has been far lower than economists might have expected with this much financial easing. “Why has the loosening of financial conditions not offset more of the growth slowdown?” BlackRock asked in a recent research noteEven as this super-loose policy causes asset prices to soar, it is destabilising the investment strategies of many mainstream investors, including pension funds and insurance companies. “The key question is, ‘how do you make money in an environment of negative rates?’” said Paco Ybarra, head of Markets at Citi Group, adding that falling rates and volatility have tipped the system into “a financial ice age”.To compensate, mainstream investors are buying assets of longer duration, lower credit quality or in much riskier parts of the world. “We have to pick our risks,” said Ms Richards.The Fed denies that this poses serious dangers to the financial system. But some financiers are becoming alarmed.But here is the trillion-dollar rub: if a shock does occur — from the coronavirus or anything else — investors are likely to expect, even demand, even more central bank support. After all, when US repo markets gyrated last autumn, the Fed rushed to help. Mr Powell may have said he expects to slow down those repo interventions later this year, but few financiers believe this would occur if jitters re-emerged. Financiers expect the FED to intervene if any problem happens


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