A new piece of research from Morgan Stanley makes the case for a virtually endless cycle of global central bank easing. As one central bank engages in QE and weakens its currency, this country’s trade partners import deflationary pressures and in turn is prompted to embark upon its own easing program. This phenomenon leads to an endless cycle of easing and competitive devaluations by central banks:
This endless cycle of easing has a few critical investing implications:
- The Federal Reserve has to be careful with its planned tightening for fear of completely unhinging the multi-trillion dollar global US dollar carry trade
- Asset prices are likely to remain well supported, particularly in countries which engage in large scale quantitative easing programs
- The US dollar will remain one of the best performing global currencies
- Precious metals should perform well, particularly in non-US dollar terms
In summary, fears of a Fed tightening cycle are probably overblown as the Fed is sure to be mindful of the consequences of its actions on the global dollar carry trade. Moreover, low inflation and elevated financial asset prices are here to stay for a long while longer.