Central bank stimulus, the linchpin of the post-crisis global economy, is losing its effectiveness and creating a potential land mine for investors, according to the latest projections from strategists at bond giant Pimco.
While the Newport Beach, California-based firm said its forecast of most likely conditions entails slow but steady growth and gently rising inflation, it noted that "left tail" risks are rising. The reference is to a bell curve of likely outcomes, with the least desirable on the left tail and the most desirable on the right.
Exploding debt levels along with central bank policies — zero and negative interest rates and trillions of dollars worth of money printing — threaten to upset global stability.
"While there are myriad uncertainties, there is no doubt that a global disruption of our baseline scenario would have serious repercussions for growth, inflation and financial markets," Pimco strategists Andrew Balls, Richard Clarida and Daniel J. Ivascyn said in a report. "The risks are uncertain, but they are real, and active investors can aim to put a price on them."