It is always a great pleasure to be able to discuss the global financial situation with Louis Gave and have Richard Bonugli moderate the discussion. There are several issues discussed in this hour podcast but I want to provide listeners with a key rule of Gave: While it may seem like forecasting it is anything but. It is merely adapting to a changing landscape as global investing is dynamic in nature while so many critical academic models are STATIC. It is up to those who invest in myriad number of relevant asset classes to be aware of the changing conditions in an effort to MINIMIZE losses from ill-conceived trades while seeking to find the greatest profits potential from being able to analyze the changing conditions.
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When the alchemists of the century, the Swiss National Bank, suffers headline losses of $143 billion for 2022 it behooves all of us to be vigilant of positions gone awry, or when a new dynamic is beginning to impact the previous desired complacency. Unlike the SNB, readers of Notes From Underground do not have a PRINTING PRESS to paper over our losses. This week brings monetary decisions from the FED, BOE and the ECB. While all the aforementioned institutions went down the rabbit-hole of QE and zero interest rates together their need to exit this long held policy vary and therefore they will all have to embark on somewhat different strategies. The ECB cannot fully exit from QE for fear of creating FRAGMENTATION in the price of EU sovereign debt, causing political problems for the entire edifice of EU governance.
This week will certainly be volatile as algo-driven firms react to key words from institutional releases and press conferences. Hawkish or dovish patience and well conceived risk levels from competent technical analysis is advised. The question remains: Who is buying long duration debt in an inverted yield curve environment, especially as global bond markets have suffered great price distortions because of the many years of price manipulation by the world’s major central banks.
Meanwhile, there is a Bloomberg story circulating this weekend titled, “Pension Funds in Historic Surplus Eye $1 Trillion of Bond-Buying.” The result of rising interest rates has been that corporate pension funds are “awash in cash” and can now buy bonds to meet future obligations rather than overweighting equities, thus derisking their portfolios. This may be a piece of the puzzle as to who is buying duration but it begs the question: Is this the best decision in acting as a fiduciary. Ten-year Treasuries are yielding 3.8% in a 4.5% inflation environment. Are government liabilities going to shrink or explode in the next 10 years Recession or not, to be buying bonds of a long duration implies a severe economic downturn with disinflation a result. Will the central banks ever allow that?
Tags: BOE, central banks, ECB, Fed, long duration, Louis Gave
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