Market gyrations reflect fears about the unwinding of QE

Last week, before the global market meltdown, three dozen luminaries of American finance gathered for a summer lunch, where they conducted informal polls about the outlook. The results were pretty dull.

There are two lessons here. The first is that not even ultra-well-paid financiers – be they hedgies, private equity players or bankers – can really forecast the precise moments of market meltdowns. Yes, fundamental strains and cracks can be identified. But judging when these will cause a market earthquake is as hard as real geology; humility is required. And doubly so given that the rise of algorithmic trading is creating dramatically more price volatility and feedback loops.

But the carry trade appears to have exploded after late 2021, when the US moved away from QE and zero rates. Then, when the BoJ also started to tighten earlier this year, the rationale waned. Unsurprisingly, this leaves some investors hunting for other long-ignored QE distortions that could also unwind. This week readers asked me if there will be another shock when the BoJ or Swiss National Bank wind down the equity portfolios they acquired in recent years .

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