The years since the financial crisis have been marked by $13.7trn of central bank asset purchases, 572 interest rate cuts and an “explosion” in the monetary base, leading to rising asset prices and last year’s surge in stockmarkets.
Bank of America Merrill Lynch chief investment strategist Michael Hartnett points out that the mood in markets and the wider economy seems to be optimistic. However, he remains aware that a number of ‘pain trades’ could emerge to break this sentiment.
“While we remain bulls, we also want to be cognizant that the consensus is also now pretty bullish,” Hartnett says. “The liquidity supernova will undoubtedly have unintended consequences and that it would not be surprising if at some point the liquidity caused a bubble and/or liquidity withdrawal caused a huge spike in volatility.”