Via bearish legend Albert Edwards of Societe General:
…investors are perplexed. How can government bond yields have fallen so low in such a short space of time…there is a lot more to come.”
…when you see the creeping advance of negative bond yields throughout the investment universe, you really start to doubt your sanity. For me it is not so much that 10y+ government bond yields are increasingly negative, but when European junk bonds go negative I really start to scratch my head.
…this government bond rally is not a bubble but an appropriate reaction to the market discounting the next recession hitting the global economy from all overleveraged corners of the world (including China), with close to zero core inflation and precious few working tools left at policymakers’ disposal.
…the bubbles are not in the government bond market in my view. They are in corporate equities and corporate bonds.
…US and even eurozone government bond yields are not in fact overextended – certainly not on a technical level – but also that fundamentals should carry government bond yields still lower.
…looking at the chart for German 10y yields (monthly plot) their decline to close to minus 0.7% does not seem so extraordinary – merely the continuation of a downtrend within very clearly defined upper and lower bounds…the bund yield has remained in the lower half of that band since 2011, but there is good reason for that as the ECB has struggled with a moribund eurozone economy and core inflation consistently undershooting its 2% target.
…the US 10y has mostly occupied the top half of its wide downtrend band since 2013…we are on autopilot until we get to 0.5%.
…the last few cycles have seen a sequence of lower lows and highs for nominal quantities (along with bond yield and Fed Funds). I have used a 4-year moving average and have added where I think we may be heading in the next downturn and rebound – and more importantly where I think the market is now thinking where we are heading.
…that is why this is not a bond bubble. It is the next phase of The Ice Age. And it is here.
…Does anyone seriously believe that in the next global recession equity markets will not collapse? Do market participants really believe fiscal stimulus and helicopter money will save us from a gutwrenching global bust that will make 2008 look like a picnic? Has the longest US economic cycle in history beguiled investors into soporific complacency? I hope not.
Warm up the helicopter.