The old adage, "Don't fight the Fed,"  is perhaps even more poignant today than in decades past in the sense that the QE machine, currency creation, debt cancellation, etc. is not confined to the Fed but is a global phenomenon.  We have wondered here for 3 years or more how the continued expansion of global debt could ultimately play out any way other than badly.  While we still think badly is perhaps the most likely scenario, it may be that the CBs will have the luxury of continued balance sheet expansion/money printing without runaway inflation.  They may even expand their balance sheets more aggressively in the future to fund large-scale infrastructure spending, most likely in the US.  If this is possible without crippling inflation and/or a currency collapse - more of a fiat money collapse vs. hard assets than a dollar collapse - asset prices would likely continue to levitate at current substantially overvalued levels, more jobs will be created to increase the wages of many, and there is no real day of reckoning as long as the Fed or other CBs hold the debt.  It all seems almost too good to be true, which is why we are skeptical it goes quite so smoothly. Nonetheless, the global 'Fed' is quite determined to do "whatever it takes" to create some inflation, and they seem to have the authority and independence to do it.  Calling the collapse of an entire regime is very difficult to do...until after the fact when it seems so obvious in hindsight.

From the Fund's perspective, the 'prolonged levitation' scenario, i.e. more of the same, is probably the best case scenario.  In this environment, asset prices remain inflated, so our collateral position is solid, but we are earning an enormously outsized coupon while we wait.  In fact, a high-inflation environment is not necessarily bad either as our collateral position remains healthy and we get to reset rates higher regularly to keep up with accelerating inflation.  This is also likely in an environment where other financial assets are feeling pain.  Higher implied rates of return generally mean lower prices.  The toughest environment for TFP is a deflationary environment where borrowers are defaulting and collateral is going down by 30% plus.  We might have thought this was the most likely scenario given the enormous global debt overhang.  However, the central bankers seem pretty determined to continue QE indefinitely, which may go wrong but probably in a direction that doesn't really hurt TFP too much.