EFTA01388574.pdf

The limits of monetary policy Amatost Ettyon hearth nit; 11.1 Old correlations aro breaking down 1.0 • ConMahn Dsr vo Bonds' (monthly data. 12 nvonth roomy' Until recently, investors could imunt on 0s returns from equities to bo negauvishr correlated with returns on government bonds for most of the lime As the chart comparing 04 the German Dax and t0-year Bunds 0? illustrates, this relationship was not stable, hut the tendency was clear. In recent montha. by contract correlations have turned positive. This meant that adding government bonds to 4.4 an equity portfolio has become a much less 4.6 4a .I.0 \pi" of fectnaa tool to reduce the overall risk profile. 2000 2002 2004 2101 2008 2010 2012 2014 2016 Stomas Stoombmg Foam L.P.. Ontinzhe 4aea Mantranent mveoutamGmbat, as a( 03201 ' Das &on Index 2 13MA Metra Lynch 7.10 Yaw thrrnan Gower-meal MO., These are early signs that CIE euphoria has come at a cost. It may have assisted generating high returns in financial markets in recent years, but investors should expect leaner times ahead. In the meantime, there are likely to be dramatic swings - in both directions. Over the medium term, it appears likely that confidence in the ability of central banks to stabilize financial markets will continue to erode. Just because this is likely to happen eventually, however, does not mean we are quite there yet. Central banks still have options —and willingness too, it would seem, to creatively use any readily available tool remaining. However, betting on their magic touch is getting riskier. Look at how last December, the ECB caught investors on the wrong foot. Markets had grown used to its President Mario Draghi over-delivering. Instead the ECB underwhelmed in the short term. It only tinkered on the edges of its existing QE program, focusing instead on cutting (its already negative) deposit rate further in the wake of similar decisions in several smaller European economies. Sweden, Denmark and Switzerland have increasingly relied on negative interest rates to discourage capital inflows (see box). Beyond the zero bound Negative interest-rate policies (NIRP) have always been controversial in the academic community, and even less systematic research has been done on their effectiveness than with respect to DE. We believe, their growing use raises at least three issues: 1. What's the point of negative nominal interest rates? The answer to this question should be clear from section 2. If they can be implemented without too many detrimental side-effects, NIRP offer a neat way out of the liquidity trap. Monetary policy regains its power to push real interest rates lower, even in a low-inflation environment. Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected retums will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0092206 CONFIDENTIAL SDNY_GM_00238390 EFTA01388574