Helicopter Money Has Arrived... And Nobody Noticed: Here's Why

Deutsche Bank's Jim Reid is one of the few strategists on Wall Street to admit he was wrong (although he may still end up being right). Previewing his annual credit outlook titled "Volatility Ahead", Reid confesses that "we’ve long felt that as we approached 2017 we would likely be at the turning point of the credit cycle. Indeed our forecasts are for wider spreads in our annual outlook for the first time since the Euro Sovereign crisis earlier this decade. However in the course of writing this outlook much has changed." 

The strategist admits that, alongside virtually everyone else on Wall Street, he became bullish, overnight on just one catalyst: the election of Donald Trump, which was universally panned by most experts (if not here) as a major selloff catalyst only for everyone to pull a "Bill Ackman" and realize the next morning that (as we explained) that Trump is actually extremely bullish for risk assets.

"The forecasts are less bearish than they would have been when we started writing this publication in late October partly because spreads have widened notably since and also the probabilities of a US recession in 2017 have lessened given the possibility of aggressive fiscal spending from the new US administration."

Naturally, this is the bullish assumption which in the past two weeks has been adopted by all, namely that Trump will unleash a trillion dollar (or more ) debt issuance spree, aka "massive" fiscal stimulus, an assumption which we explained yesterday will soon be challenged by Congressional Republicans. However, more than a simple political hurdle, a greater gating factor is what happens to interest rates, a traditional buffer to risk assets any time the economy is on the verge of overheating: should they rise too high, the entire stock market house of cards falls.

It is here that Reid points out something truly fascinating, namely the interplay between monetary and fiscal policy, however not at the national level, but at the international, where the US is injecting hundreds of billions in debt in the global system, which then is soaked up not by the tightening (for now) Federal Reserve, but courtesy of foreign central banks such as the ECB and BOJ.

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