VOLOCAUST
It’s not just the start of the week today, but it’s also our first opportunity to welcome you to the start of a new period in financial markets.
It’s back. After years of central bank suppression, just like that, volatility came back with a vengeance. Very close to a return to some type of normal… but we still suspect the ship of normality has sailed so far away it’s even hard to see with the Hubble.
So, share markets took a tumble, short volatility players got torched as the bond market lead the way.
Inflation and interest rates? They’re going up.
As confirmed this morning by the great Christopher Joye of Smarter Money Investments, rates will rise, asset prices will correct and central banks will do all they can to verbally placate markets in the face of rising inflation.
To add to this, Joye is quite confident that because the FED is soooo far behind the curve for fear of inflation, they’ll not got straight to QE when markets tumble. That’ll make things interesting for a market whose constituents have been investing for so long with the belief of Central Bank backing.
Let’s have another quick look at what it took to get here. Here, meaning now, the bubble everything, now.
It’s the now that forces investors to take a disproportionate risk for a touch more yield or return.
And the reason they are having to take extra risks is because for the last 8 years they’ve been competing with this below.
Central banks purchasing assets to keep interest rates suppressed and asset prices rising!!
And now they’re threatening to take it away?? For how long, we don’t know.
The chart below is one indication but somewhat misleading, Japan is nowhere near winding back and the European Union would fall apart without the current €60 Billion per MONTH in asset purchases.
However, if the chart below did play as Deutsche hypothecates, life’s about to get a whole lot more interesting.
BOND KING
During his January webcast, The New Bond King, Jeff Gundlach correctly predicted that if the 10-year U.S. Treasury note yield went above 2.63%, U.S. stock investors would be spooked.
The 10-year yield is currently trading around 2.84%, and its spike today on the heels of the “deficit-busting” Senate agreement which would lift spending caps by $300 billion above current levels, sent the markets into the red after an impressive morning rally.
In little comfort for equity bulls, Gundlach said it is “hard to love bonds at even a 3 percent” yield. “Rising interest rates are a problem and the U.S. is in debt and there is massive bond supply.”
Well, if the Senate passes its bipartisan spending deal, which has been blessed by Trump, it is virtually certain that the 10-year is going above 3%, and stocks will not like it, prompting more angry outbursts from Trump who wants both the spending deal and daily all time highs in the S&P, which – absent a new Golden Age for US economic productivity – looks virtually impossible”.
UNTESTED
We noticed something very interesting last Monday night when the reality of a falling share market was dawning on CNBC anchors in the US. There was this constant reference to and monitoring of stress in the ETF, “passive” investing index space.
Is this concern because they’re mostly a post GFC creation and, therefore, not stress tested? We’re not sure.
Renowned Billionaire Investor Carl Ichan didn’t seem quite so unsure when interviewed on CNBC last week (they’ll probably not have him back).
Reflecting on the markets moves recently, Ichan shocked the anchors by saying, “This is something we’ve never seen before”.
“I don’t remember ever seeing a market with this kind of volatility over two weeks, the market has become a much more dangerous place due to index funds and ETF’s…..its like 2008 where everyone was buying mortgage and CDS.”
Concluding that: Passive investing is the major bubble right now, there is going to be a major, major correction”.
“This is a manifestation of a real deep problem we have in our markets.”
There is a huge bubble of passive money flowing in…a sort of euphoria and a lot of people are going to pay the price, just like 1929.
“I do think markets will bounce back but these are the rumblings before the earthquake”
The market is telling you something….its telling you its very dangerous….its way over leveraged”
Well, he’s certainly right about that.
So, welcome to 2018 everyone.
Inflation and interest rates are on the rise. Invest accordingly.
We’ll continue this theme in a note later this week.
In the meantime, we like to remind you China’s One Belt, One Road ambitions are real and seem to be providing a level of support for commodity prices.
……and Gold?……….more on this later.
