An Autumn of discountent.

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The Doves are back and growth is selling at a discount.

Stephen Bartholomeusz wrote an excellent article in the SMH.

If you missed it, here is a link to Stephen’s article.

We all know that total debt outstanding, debt to GDP ratios and many Government deficits are higher than they were before the onset of the GFC in September 2008.

We also know that the Great Lakes of liquidity in the US and Europe in particular are still almost at their high water marks, with the US lake only slightly lower.

In the US, Quantitative tightening (QT) through the balance sheet run-off is drawing to a close this year and rate hikes have stopped as a result of President Trump’s jawboning, plus a dove-hawk-dove Federal Reserve.

This behaviour perpetuates the Congress-approved Geithner/Paulson TARP driven bailouts that occurred in the wake of the sub-prime/Lehman/AIG crisis in 2008 - that were quickly followed by the great Quantitative Easing (QE) experiment that started in 2009.

QE Infinity?

Some years ago I wrote that successive rounds of QE, i.e., QE1, 2, 3, etc., would at some stage merge into QEI, that is QE Infinity, unless the great lakes of liquidity were drained (normalised).

Well, this month, those Great Lakes now contain 10 years of water (with a small amount drained from the US lake) - with trade wars, Brexit and an end to QT for the moment promising to provide accommodation to those rowing in the bursting lakes, but in effect, threatening to weaken the dam walls.

Unfortunately, there is little to no chance of draining those lakes any time soon.

Hard to discount further, or is there?

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Oversupply of anything causes price to fall. Oversupply of money means falling interest rates. German, Swiss and Japanese bond yields are now negative.

Interest rates remain low and other than for in the US, provide almost no room to move down in the event of another crisis.

In his article, Stephen eloquently points out why he’s starting to get worried. He sites the recent negative yield Bund issue (i.e., German Bonds issued on an interest rate of minus 0.05 per cent) and points out that there was demand to effectively issue double what was issued!

Double the fear?

“The willingness of investors to accept negative yields is effectively a barometer of fear.

Self-evidently those who took up the German bond issue were prepared to lose 0.5 per cent a year – about 1.5 per cent if Eurozone inflation is taken into account - rather than risk an exposure to those assets with positive yields. Italian and Greek government bonds have, for instance, solidly positive yields (3.45 per cent and 3.76 per cent respectively) because of their perceived riskiness.”

Stephen Bartholomeusz.

He also points out that there is now over US$10 trillion of negative rate bonds on issue.

Absolutely, fundamentally and unequivocally a signal of, risk-off.

Market watchers and the Trump Administration continue to talk up the strength of the US economy. Not sure about that, but given that nearly half of all revenues generated by US S&P500 companies are generated outside of the US in regions where growth is in reverse, I’m not so sure why they are all so bullish?

Western Australia?

Sell-side - all eyes on China iron ore demand in light of its ‘blue skies’ directive (they are our largest export customer).

Buy-side - one eye on a potential weakening in the USD if there are rate cuts (USD exports convert to a lower amount of AUD if the US weakens) with the other eye on the RBA as a potential counterbalance, in the event of rate cuts here as well (and with the upcoming Federal Budget also likely to have an impact on the dollar).

Regards, Mike.


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