Kicking The Can Down The Road

When a crisis arrives, there are two ways to respond to it. One is to solve it, and the other is to postpone action. The Evergrande crisis seems to be heading in the latter direction. The same approach is being taken by various Central Bankers in their response to inflation. Overall, everybody wants to postpone difficult decisions.

Decisions impacting growth are particularly being deferred. Nobody wants to spoil the growth party. But while the decision on interest rates can be deferred, the reduction of liquidity cannot wait. It is a matter of time till Central Banks accept this reality. Until then the party in stocks, commodities, and bonds may prolong. But the prospect of imminent tough decisions will spook that party all of a sudden. It is a matter of conjecture if the markets will act faster and ahead of the actual event.

Investors have the option and responsibility to second guess what central banks will do on liquidity. Anticipating the market response to central banks’ actions will help investors prepare their portfolios well ahead of time.