I’ve long idea that fiscal markets are principal magicians. They larn you lot looking at the ane paw that’s waving around, spell the existent magic is beingness performed with the other hand. There stimulate got been a lot of waving hands inward 2015, including the the US dollar too rates, stocks, too assets inward PRC too emerging markets. All that paw waving has led only about investors too traders to lament an absence of clear themes too trends inward macro markets.
Meanwhile, existent magic tin post away endure constitute inward the trends depicted above. The transcend nautical chart is a weekly nautical chart of the WIP ETF, which tracks the prices of international inflation protection bonds. The middle nautical chart is a weekly depiction of the JNK ETF, which tracks the prices of high-yield bonds. The bottom nautical chart is of the EMB ETF too takes a weekly expect at the prices of emerging marketplace bonds.
Since the middle of 2014, these stimulate got been inward a steady decline. We are seeing global deflationary forces, with higher character debt significantly outperforming lower character debt. In short, in that location is likewise trivial increment too too much debt globally. Per the charts above, markets perish on to cost inward continued deflation too continued concerns with the sustainability of debt.
Now this is the betoken where the weblog author is supposed to trot out the uber-bearish scenario too headline the slice with a dire alert that volition attract the eyeballs inward cyberspace. I strongly suspect, however, that the perma-bear thesis is yet only about other paw moving ridge of the magician. Here’s what I’m watching inward the magician’s other hand:
1) Quality – There are likewise many baby-boomers silent out in that location needing to protect their capital. Many stimulate got been reaching for yield too seeking returns inward stocks. Stocks stimulate got been a mixed blessing: potent if you’ve been inward consumer-related sectors, weak if you’ve been inward commodity-related shares; stronger if you’ve been inward developed marketplace stocks, weaker if you’ve emphasized emerging markets. Those of us former plenty to recollect the “Nifty Fifty” know what it’s similar when a marketplace reaches for quality: large, stable companies with decent dividends too increment too trivial debt. If the trends depicted inward the charts inward a higher house continue, it’s non hard to imagine a “boring is good” mindset alongside investors: ain stable, character materials that won’t interfere with your sleep.
2) Volatility – Some debt volition non endure sustainable too continued deflationary forces volition weigh on global growth. That could Pb us far from the depression volatility markets we’ve enjoyed nether global regimes of quantitative easing. The smart coin managers I know limited concern for the liquidity of many assets. With investment banks no longer every bit active every bit counterparties that tin post away warehouse risk, nosotros are increasingly vulnerable to shocks. That’s an surround inward which you lot desire to ain negative tails too endure long volatility. Predicating trading too investment strategies on the kinds of markets we’ve had from 2012 to mid-2014 has non worked good of late. It’s non hard to imagine that the recent give-and-take of Fed hiking volition expect quaint inward 2016.
If all this is correct, a tipping betoken powerfulness come upward when fundamental banks perish on their easing but no longer tin post away make the depression volatility shift from bonds to stocks that nosotros saw from 2012 to recently. In other words, deflation dynamics would outweigh QE dynamics across assets. In such an environment, the accomplish for yield would endure replaced yesteryear a accomplish for stability. For those non prepared, that could expect suspiciously similar dark magic.
Further Reading: Why Traders Succeed too Fail inward Financial Markets