One month ago, Citi’s credit team laid out its outlook for the coming year in what – in our opinion – was one of the gloomiest reports for the coming year, and included the following fascinating revelation according to which central bankers appears to have lost control: “That seems to be a growing fear among a number of central bankers that we have spoken to recently. In our experience, they too are somewhat baffled by the lack of volatility and concerned about the lack of response to negative headlines…. Our guess is that sooner or later in the process of retrenchment they will end up going too far – though that will only be obvious with hindsight.” As we said at the time, “frankly, that’s about the scariest admission from one of the world’s biggest banks that we have read in a long time.”
And while Citi’s “base case” was clearly bearish (our summary can be found here) – what was left unsaid was even more interesting, if not troubling. As the bank’s credit team writes “what about the outcomes that didn’t quite make it into our base case? The scenarios that aren’t central, but which aren’t entirely implausible either – both bullish and bearish.
So ‘What if…’:
idiosyncratic risk is returning to credit? European corporates get more aggressive? global growth & commodity prices disappoint? inflation accelerates as output gaps close? the US yield curve inverts? central bank tapering really is a non-event? the market doesn’t like the choice of ECB successor?”
This post was published at Zero Hedge on Dec 24, 2017.