Nomura: We Are Far Away From Any Kind Of Normalization

Strategists at Nomura in their Asian multi-startegy note wrote yesterday:

The result of this is an asset price bubble – accompanied by price deflation. Liquidity is being created to allow countries to re-adjust their obligations, reform their economies, restructure debt and bring down fiscal deficits. It is also being created to bring down the cost of borrowing. All this takes time as the healing process begins. In the meantime, this liquidity is searching out returns. (Money never rests.)

What’s a central bank to do? This is especially problematic when (and if) inflation returns before liquidity measures are withdrawn. If inflation returns while the economy is still in the “intensive care unit”, then central banks would see fit to raise rates. The problem is that central banks may see a temporary phenomenon as somewhat permanent and raise interest rates only to cause a worse “relapse” in economic problems later.

Now, let's move straight to intensive care unit:

While spreads have come down by half from the extreme levels around the collapse of Lehman Brothers, we want to create a context for just how high they currently remain:
1) Spreads are now higher than spreads during the two recessions of 1971 and 1975.
2) Spreads are now higher than the economic malaise and high inflation of the early 1980s.
3) Spreads are slightly higher than just after the attacks of 9/11.

Indeed, we can see that the system is still in a critical condition. To state otherwise is to deny what credit spreads are telling us. Withdrawing liquidity right now is simply too dangerous, even if the odious presence of asset inflation is amongst us.

So, the US consumer so far is very indifferent to liquidity supply ... Let's drive the food and energy prices to the sky, so we can experience another consumption shock?