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Grant's Interest Rate Observer Pdf Download
Maxey, whose prophetic ideas on the volatility of the inflation problem have featured in these pages before (e.g., Grant's, July 8), did not decide to go net short on a hunch. For months, he's been working up a theory about the intersection of interest rates, asset prices and liquidity.
Our reading of the situation, informed by Maxey, goes like this: The upside lurch in short-term rates puts pressure on stock and bond prices. Post-2007-09 financial regulation crimps liquidity in unpredictable ways. What began as an interest rate shock will thus become a liquidation event.
Of course, financial risk didn't disappear; it moved, and it moved to the investment managers whose clients, under the spell of QE and ultralow interest rates, were shifting heavily into stocks and credit. Note, Maxey observes, that the balance sheet of an asset manager is inflexible. It expands with investment inflows, contracts with investment outflows. Banks, assuming that they have sufficient capital and regulatory leeway, can absorb risk even as others shun it: "They can flex their balance sheets," says Maxey, "and, as a result, they either directly or indirectly set the tempo of markets."
Financial historians and senior citizens well recall the American disintermediation drama of the 1970s. Inflation lifted market interest rates, though not deposit rates, which the Fed's Regulation Q had capped. It was a dull saver who failed to notice that higher returns were available outside the walls of his or her bank. Newfangled money-market mutual funds welcomed the aggrieved former depositors. 2ff7e9595c
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