Forget a recession: BlackRock's global research chief warns of an even more perilous threat to markets that's approaching for the first time in years

trader china hands on head

  • The next big disruption to global markets is unlikely to stem
    from a recession because central banks are working overtime to
    extend the ongoing expansion, according to BlackRock. 
  • Jean Boivin, the global head of research for the BlackRock
    Investment Institute, told Business Insider what he sees the next
    crisis stemming from instead, and explained how it would distort
    the established relationship between stocks and bonds. 

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What if the source of the next big disruption to global markets
is not source as obvious as a recession?

It’s a question that’s been asked and answered by
Jean Boivin
, the global head of research for the BlackRock
Investment Institute. 

The next crisis might instead stem from a combination of slow
growth and somewhat higher inflation than what we’ve seen over the
last few years, he told Business Insider during a recent
interview.

This is a combo that could surprise investors and mark a major
regime change, he said. Since the Great Recession, for example, the
economy’s growth has failed to meaningfully lift inflation. It’s a
mismatch that puzzles even the smartest minds in finance and
challenges the
conventional theory
that growth and inflation should move in
lockstep.

“There have been periods where we’ve seen them moving in
different directions,” Boivin told Business Insider by phone. “This
is why we’re emphasizing it, because the last five years have not
been representative of history and we could see this type of
combination.”

He added: “Asset classes will not be the same way they have been
over the last five years if we were to enter that world.”

He specifically flagged the negative relationship between stocks
and bonds; when stocks fall, bond prices rise because investors
pile into Treasuries as a safety net. But this relationship has
thrived in the period of low inflation that investors have become
accustomed to, according to BlackRock’s research.

The red area chart below shows inflation has been subdued
relative to expectations for decades, and the yellow line shows
that the negative correlation between stocks and bonds is still
intact. 

Screen Shot 2019 07 12 at 9.32.22 AM

This negative correlation is at risk of being upended by the
combo of high inflation and low growth, Boivin said.

As for what might trigger the dicey combo, he pointed to trade
protectionism: If the world’s largest economies continue to
restrict free trade, they would both raise the prices of goods and
hamper economic output. And this two-part risk is more pressing to
Boivin than a recession.

Read more: BlackRock’s global research chief
explains why the stock market’s principal driver just changed —
and breaks down how investors should adjust to the big
shift

To understand why he doesn’t see a recession as the biggest risk
to markets, look no further than central banks’ sharp pivot to
dovish monetary policy. The European
Central Bank
was first to signal in June that it was ditching
its policy of patience and shifting towards pumping more stimulus
into its economy. The
Federal Reserve
then followed by affirming the bond market’s
view that interest rates should be lowered over the next
year. 

Stock-market investors have cheered the Fed’s pivot with a rally
to all-time highs. But the impact of what the Fed did might go
beyond the market’s reaction — it’s likely to keep a recession at
bay and stretch the longest-ever economic expansion, according to
Boivin.

That’s why he recommends that investors remain positive on risk
assets even though trade has created uncertainty about the global
economy. 

SEE ALSO: JPMORGAN:
These 4 drivers are all you need if you want to master the market
heading into 2020


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Source: FS – All – Economy – News
Forget a recession: BlackRock's global research chief warns of an even more perilous threat to markets that's approaching for the first time in years