A supply shock for the ages makes policy tricky: Stephen Miller

March 11, 2020

GSFM’s investment strategist, Stephen Miller, writes for the AFR:

Maybe it is a bit unfair to mock the Fed’s response to the coronavirus as panicked and perhaps of limited utility given that the issue is best viewed as a supply shock. After all the Fed (and our RBA) pulled the only lever they could in the circumstances.

Something that has escaped notice during the pages of anxiety-ridden ink devoted to the coronavirus is that being a supply shock it has a potential inflation dimension.

This makes for a tricky environment for both policymakers and investors. Policymakers because options are limited for quick and highly effective responses. For investors because it may portend a potential regime shift in the relationship between the prices of financial assets.

It is true that government bond and equity returns continue to be negatively correlated. In an appropriately diversified portfolio of government bonds and equities, falling bond yields (rising prices) cushion the negative impact of declining equity markets.

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This article has also been published as an Investment Perspective.

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