• Low rates and a swell in QE have helped sow economic recovery, but there are costs to the effort as well
• For investors, the shift in policy has led to a collapse in returns and thereby leveraged risk taking
• With the reach for yield, it is only a matter of time before the imbalance hits its tipping point
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Unorthodox monetary policy (QE) has been hailed a successful new monetary policy tool that can charge economies to exceptional growth. Accommodation certainly stabilized the financial system and helped feed an economic recovery, but its scale has increasingly fueled distortions that generate their own risks. One direct detriment that has arisen from this dovish policy is exceptionally low yields. For investors, that is low returns which need to be compensated for (especially with the S&P 500 - as a benchmark - soaring) via increasingly risky means. This has changed the landscape of the markets with volatility returning and market participants decreasing their time frame to focus on short-term swings. These conditions will eventually lead to a speculative deleverage, and that eventuality may be closer at hand than many expect. We look at this big picture risk in today's Strategy Video.
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