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2022-09-23

The post-Volcker, multi-generational trend of low yields is over

 We’re living through arguably the most truly global attempt to tighten financial conditions in memory.

The downward trend in 10-year Treasury yields that has persisted ever since the Fed under Paul Volcker slew inflation is over. 

The joys of bond math mean that a rise in yield from a lower level can inflict a greater dent on the price

Losses that holders of 10-year bonds have suffered since 1961. With 2022 not quite three-quarters over, this is already the worst year for bond investors in six decades

Read the latest opinions of Albert Edwards. 

Societe Generale’s chief investment strategist is (slightly unfairly) known as an inveterate perma-bear. He’s certainly been negative on equities for a long time, but he’s also (correctly) been bullish about bonds. 

His thesis, inspired from his time in Japan in the 1990s, was that the US and the rest of the developed economies faced an “Ice Age” in which yields stayed permanently low. So psychologically, it means a lot that he is now prepared to declare the Ice Age over. 

He thinks bond yields will keep rising. But don’t worry, that doesn’t mean that he’s gone positive on stocks:

Politicians begin to shed their fiscal shackles. Until recently, economic ideology had prevented them breaking free from fiscal austerity. That had caused central bankers to fill the economic void with super-expansionary monetary policy. Those days are now over and aggressive fiscal activism reigns supreme, most visible currently in the UK.

The yield curve has now inverted to more than 50 basis points for the first time in more than 40 years 

Both the fed funds rate and the 10-year yield are still far below the level of inflation, so on this basis real rates are still negative.

Britain’s Labour Prime Minister Jim Callaghan imparting painful truths to his party conference. Callaghan hasn’t gone down as one of the great prime ministers; he took over the job only when his predecessor (who’d been diagnosed with early-onset Alzheimer’s) resigned. 

/RE: Aha. Harold Wilson was not a Russian spy?/

He went on to lose to Margaret Thatcher in 1979. But he was a decent man who inherited an impossibly difficult situation, and took solid steps toward sorting out the UK’s problems. With hindsight, some even date economic “Thatcherism” from this speech, when he accepted the case for fiscal discipline. 

John Authers Bloomberg 23 september 2022

https://www.bloomberg.com/opinion/articles/2022-09-23/bond-yields-leave-the-ice-age-as-post-volcker-trend-ends-for-world-economy


If Edwards is correct, it will come as a shock to investors who are used to stocks going up most of the time, and a Fed that always had the market’s back.

Barrons 23 September 2022

https://www.marketwatch.com/articles/stock-market-lost-decade-51663945507



12 Reasons Why Negative Rates Will Devastate The World - Albert Edwards

Zerohedge 18 August 2019

https://englundmacro.blogspot.com/2019/08/12-reasons-why-negative-rates-will.html


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