2016-07-13afr.com

Monetary policy is beating a path to a world where conventional market signals such as credit spreads and the price of risk will "finally perish" and be unseated by one where states are the drivers of credit, and spending and capital formation is the domain of central banks.

"It would take the form of state-sponsored stimulation of consumption, investment, [research and development] and rescuing what essentially is a bankrupt financial superstructure (ie banks, insurance, life and pensions)," the Macquarie report, authored by Hong Kong-based analyst Viktor Shvets, said. "Whilst similar to FDR's New Deal, it would be a far more distorted world than either the 1930s or the 1960s-70s, with brand new investment signals."''

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The contradiction that Macquarie is referring to is the way markets have behaved since Brexit, where assets historically linked to "risk-on" and "risk-off" moods have inexplicably rallied in unison. Equities, a classic risk asset, have recovered all of their losses since the Brexit vote on the belief that central banks will step in and lift asset prices by doing stimulus and ignore sound fears about asset bubbles.

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As for the average investor thinking about where to put their money, Macquarie says mean reversion strategies -- where someone buys a stock in the hope that it will return to what it used to be worth -- will not work in a world without a classic business cycle and proper signals. Macro strategy investing is equally impossible until the new world of state-sponsored growth is here.



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