Economics & Strategy

Same Old Song and Dance...

—David Zervos, Global Head of Fixed Income Strategy & Economics

In July 2012 we wrote: “Central banks will continue to be the ultimate backstop against the European chaos. This is why
we continue to believe in a bullish risk asset reflationary trade. Yes, there will be a period of continued uncertainty, but
we should never underestimate the power of global reflationary policies. From Bernanke, to Shirakawa, to Draghi, fingers
are all on triggers. And the central bank bazookas are the most powerful guns on the battlefield.”

In October 2012: “We continue to see a favorable environment for risky assets in a world where central banks are
aggressively expanding their balance sheets and diluting the value of money. To be sure, there are plenty of shocks that
could temporarily harm the performance of risk assets. While the fiscal cliff, a Greek exit and geopolitical risks in Asia and
the Middle East all may generate pullbacks, these will create opportunities to once again profit from the central bank
backstop. We will not see the major central banks allow deflation to mix with the excessive levels of debt. In the end, the
obsession with fighting deflation will lead to an increased risk of inflation. As such, we continue to favor all asset classes
that cannot be diluted by central banks.”

Today, we do not have much new to add. Central bank policies are still the primary driver of global asset price levels.
Since the crisis began, the major central banks have bought or funded over $10 trillion in assets – everything from BBB
Japanese corporates, to Italian government bonds (BTPs), to Agency MBS. There is nothing that stops them from adding
another $10 trillion to the balance sheets if they believe it will drive unemployment lower in the context of long-term
price stability. The result is that the portfolio balance channel will drive private investors into a smaller and smaller pool
of risk assets. Further, the deployment of capital in the risk asset markets will increase our odds of real growth. The
central banks are committed to reflation and the only way to invest is with them, not against them. Ultimately, they may
go too far. And maybe in Jefferies Insights for January 2016 we will be talking about the loss of central bank credibility
and excessive inflation risks. But whether we achieve real growth in the context of price stability, or we generate too
much inflation and a lack of real growth, the only investment strategy that works in this era of central bank
aggressiveness is to own the “real” risk asset complex – equities, real estate and commodities.