The one way action in the bond market continues this morning. The mad rush into fixed income has increased in ferocity and tone.
There is no difference between being early and wrong, so I am clearly wrong with my negative bond call, but I am not climbing aboard this crazy scramble to own sovereign fixed income at record low yields.
The latest data from ICI shows investors have a different take:
Bond funds had inflows of $5b in week ended June 8; Equity funds had outflows of $3.81b : ICI
I understand all the reasons to flock into sovereign debt. Brexit, a slowing world economy, a Federal Reserve that continues to methodically tighten regardless of signals from the market - hiding out in riskless fixed income is a logical conclusion.
Yet I think we will look back at this period and shake our heads with bewilderment, wondering what we could have been thinking buying 10 year bunds and JGBs at negative rates.
As for timing, it is difficult to predict when the fever will break. But I wanted to leave you with a thought that is a little longer term in nature.
Yesterday I re-watched the Stanley Druckenmiller interview from last year. I was struck by the fact he never once claimed he knew how it was going to end. In fact, right at the beginning, he makes his inability to forecast how it will play out abundantly clear:
Sorkin: When you see where we are today, with what the Fed is doing, you have been out there saying it is a real problem, but one of the things we don’t know, is how it is going to end.
Druckenmiller: Join the club. I don’t know how it is going to end either.
Sorkin: But you have said it is going to end badly.
I agree with Druck. This huge mess will end badly. In fact that is probably an understatement. But where I disagree with the market is how to define ending badly. Most hedgies believe this means a repeat of 2008. A corporate credit collapse like Icahn is predicting seems to be consensus.
I reflected about this possibility as I listened to a podcast with Jessie Felder. He was talking about Druckenmiller as well. At one point during the interview, Jessie is talking about Druck’s successes, and it immediately hit me.
Jessie Felder: “Duckenmiller gave a speech to a country club in Texas. One of the things he said is that some of the biggest money he made at the Soros funds was to taking advantage of Central Bank mistakes. When the central banks were trying to go against the markets, they went the other way. And it is interesting too because Jim Rogers, who also worked with Soros, he says the same thing in the book Market Wizards, he says whenever the Central Banks do something, take the other side.”
Although there are Central Banks dabbling in buying equities and corporates, the vast majority of Central Bank purchases over the past 8 years has been sovereign fixed income.
If you believe the Central Banks are making a mistake, and are interested in taking the other side as Jim Rogers and Druckenmiller suggest, then you shouldn’t be selling equities. You should be selling bonds! Fixed income is the distorted asset that Central Banks have mispriced. Yet, instead of fading the Central Banks, everyone is busy buying the exact same thing… Go figure…
Thanks for reading,