Macquarie: Enjoy The Rally, But We'll Revisit The Lows Of 2018

Earlier this week we asked if, just like in early 2016, a new "Shanghai Accord" was coming.

Implicitly responding to our rhetorical inquiry, Macquarie's Victor Shvets published a report titled "Shanghai redux & Benjamin Graham" in which he agrees with us that "investors seem to be increasingly expecting that a new Shanghai Accord (a laFeb ’16) is on the horizon" an assessment which be in line with Macquarie's view that asset-based economies are "utterly dependent on ample (excessive) liquidity, persistently low (declining over time) cost of capital, contained volatilities and regular public-sector-inspired reflationary momentums" which can be achieved only by pumping liquidity at a faster clip than nominal GDP, tightly co-ordinating monetary policies and China pumping a reflationary pulse while avoiding extreme geopolitical outcomes.


That - according to Shvets - is exactly what occurred in early ’16, giving us two years of synchronized growth, collapse of volatilities and a weaker US$. This ended in ’18, and in ‘19 the rubber truly hits the road.

So with all that said, is a Shanghai Accord 2.0 indeed coming? Well, not so fast, because as Shvets explains below, while such an outcome is likely, "more pain needs to be endured first." Here's why:

The climb down by all parties (including the Fed) has always been as close as one gets to an absolute certainty. The only question that we have been raising is one of timing and how much pain would need to be endured. Neither CBs nor China are yet embracing our bleak view of the future of ever diminishing windows of acceptable cost of capital and volatilities, as private sectors atrophy under pressure of technological evolution and financialization. Instead, we see everyone (from IMF to PBoC) debating debt sustainability, reforms and returning to private sector primacy. Hence, neither US, Fed nor China want to ‘overreact’; as a result, they run the constant risk of ‘under-reacting’.

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