'Let’s face it: virtually everybody knew this was coming. But in the frantic QE-inspired hunt for yield, no-one cared. And this is always the problem while liquidity is washing through the financial markets because of loose money polices (usually centered around the Fed). Almost no one is interested in heeding the pessimists and positioning of the inevitable financial market blow-up when eventually excessively loose monetary policy is belatedly tightened. Investors, drunk on the elixir of free money, think the good times will roll on forever. And even if they are cautious, a few quarters of underperformance usually invites either capitulation or being fired. With few exceptions, being too early with a bear call is usually a career ending decision. Better to stay in the crowd, remain fully invested and go over the cliff with the herd.
Of course, it is more than just EM that is at risk of blowing up if the Fed keeps tightening (and the ECB and even the BoJ decide to join in). So many financial markets are surfing high on the tsunami of liquidity that has flooded the world over the last decade - this extends to corporate bonds, equities and real estate prices. It is a global ‘everything bubble’.The key for most commentators on whether the risk dominoes will continue to fall is the Fed tightening cycle. To repeat: 10 of the last 13 Fed tightening cycles have ended in recession. Of course, no-one knows how much tightening will cause a recession this time around, but one thing that the excellent Gerard Minack finds interesting is that the CFTC data shows that speculative investors are eye-wateringly bearish on US government bonds.
Historically the speculative positioning data works well as a contrary indicator, and hence in the absence of a major shock (like a jump higher in wage inflation), we expect US bond yields are more likely to fall from here than rise.
Another Twitter favourite of mine is @LanceRoberts of Real Investment Advice. He wrote an excellent article a couple of weeks back which I meant to highlight about US bond yields banging up against their technical extremes, indicating that yields might be set to fall.'
- Albert Edwards (
Source, August 17, 2018)
Context'After decades of overuse, debt is increasingly less productive in all of these areas..'No Inflation In Sight, Say Two Bond Masters - By Jonathan R. Laing'Central banks in Japan, the U.S. and Europe tried multiple rounds of QE. That none of these programs were any more successful than their predecessors also points to empirical evidenced failure..'' Academic research indicates that QE in the US contracted rather than expanded economic activity..''..A tightening of financial conditions portends Credit problems way beyond energy and mining..''..the long-run negative effects of debt eventually outweigh their short-term positive effects..''..an escalation of the unfolding EM crisis..''..the next financial tremors will come from corporate debt.''..we already observe the same combination of extreme valuations and divergent market internals that we observed at the 2000 and 2007 peaks..'