The Current Global Monetary Policy Distorts the Business Cycle
Business Cycle Investing: Where Are We Now?
Monetary policy affects the business cycle
Current global monetary policy is distorting our view of our position in the business cycle. The low and negative interest rate environment in most developed economies (EFA) (VEA) is the main reason behind the distortion.
The zero interest rate monetary policy stance used by most central banks seems to have its own set of advantages and disadvantages with respect to affecting growth in the economy.
Asset bubbles
While cheap credit promotes increased borrowing and spending, it also leads to the creation of asset bubbles. Bill Gross believes that “every asset price is artificially elevated,” and Carl Icahn believes that low interest rates have created an earnings mirage.
The low interest rate regime has created a situation wherein one may think that lending is increasing, which is a good sign. However, in reality, it’s creating nothing short of a bubble.
Since the financial crisis, commodities (DBC), the stock market (SPY), and the high-yield bond market (HYG) (JNK) have risen by leaps and bounds. Only in mid-2014 did the markets slow, and commodity prices reversed their trend.
Distortion in perception
How does this relate to business cycles? When we begin to assess business cycles, we look at the stock market, the bond market, and asset prices in general to get a fair idea about trends and levels of economic activity.
With a zero interest rate policy, the current level of prices and economic activity may seem quite elevated from realistic levels, leading to a distortion in our perception of our position in the business cycle.
Keeping this in mind, let’s begin to understand where we’re placed in the current business cycle.
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