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‘MMT-Lite’ is changing the markets and potentially receiving a $ 2 trillion boost

(Bloomberg) – If after a year of pandemic there is one major issue for financial markets, it now seems that officials are driven to pour huge sums of money into protecting their economies. Spending becomes flirting with the modern monetary theory that says it is that governments can spend high with little pressure on prices. President Joe Biden’s multi-trillion dollar infrastructure plan will be the next big thing. Whatever the claim about MMT, the barrage of cheap money is changing markets. The pricing models have warped, with a new generation of activist retail investors gathering on forums like WallStreetBets and Bitcoin. Even the recent explosion in hedge funds has failed to dispel liquidity-fueled optimism. The next big shift could be an outbreak of inflation, judged by warnings from the likes of former Treasury Secretary Lawrence Summers: “What Covid-19 has done is accelerate fiscal policy and response, and increasingly coordinate with monetary instruments.” Viktor Shvets, Head of Asian Strategy at Macquarie Capital Ltd. said, “It’s not MMT yet, but it’s very close. The result is atrophy and deterioration in market signals. “In stocks, day traders flushed with stimulus checks and mobilized by the“ meme ”culture have mocked traditional investment rules. The call option frenzy has subsided, but has remained historically high in the derivatives markets. Cryptocurrencies have risen at the height of the cash injections. Government policy, which Mary Nicola, global multi-asset portfolio manager at PineBridge Investments, calls “MMT-Lite” also sparked the inflation debate spearheaded by Summers The pressure during the recovery of Covid-19 is that high unemployment shows that economies are slacking off. Market expectations for inflation over the next decade have risen sharply, but are roughly in line with the Federal Reserve’s 2% target: “We see the COVID-19 crisis as a deflationary shock that will lead to the adoption of these MMT-Lite strategies at least for the moment, ”said Nicola. At the other end of the spectrum are claims to hedge assets like commodities and gold to hedge inflation risk. JPMorgan Chase & Co. strategists said last month that commodities appear to have started a super cycle of years of profits. This year’s bond market sell-off signaled investor concern that price pressures could force incentives to weaken earlier than expected, disappointing MMT advocates like the left wing of Biden’s Democratic Party. For Macquaries Shvets, investors will continue to scrutinize the political backdrop for weaknesses, but no normalization is in sight. “Most investors are asking how we can normalize fiscal policy,” he said. “Well, you don’t. The only thing that can derail it is if we suddenly have stagflation. However, in a world with high leverage and high financialization, it is very difficult to generate inflation. “Rowing with the TideInvestors is global liquidity that helped keep stocks up 51% over the past year. If we’re in a completely different zip code for interest rates, we shouldn’t get too into the exact details of historical averages, ”said Scott Berg, global equity portfolio manager at T. Rowe Price. “We’re in this crazy, strange world – stay invested, stay in the game.” Officials seem confident that history will see the $ 14 trillion global fiscal support and the support of expansionary monetary policy as the right answer to the crisis. Some veteran market watchers agree, “We’ll recall that the benefits of very aggressive policy intervention seemed to far outweigh the costs,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley Paragraph.) For more articles on how please visit us at bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP

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