I was asked recently to provide some color around the state of global fixed income markets as we close out the first quarter of 2013. Of course, one of the more watched situations in the global markets has been Cyprus’s banking crisis. I won’t go into too much depth on the subject here, as my colleague, Cosimo Marasciulo, has recently provided a comprehensive analysis.
On-shoring, energy infrastructure reinvestment and plant replacement are three trends in the making that will shake American business out of paralysis. In the last “Bond Deer in the Headlights,” I outlined the “Monetary Abolitionists” assertion that out-of-control government spending, made acceptable by historically low interest rates, was responsible for corporate paralysis in investing and hiring.
That camp also believes that as a result we are likely heading for credit crash, and shouldn’t be worried about the possibility of a rising-interest-rate environment. In terms of government spending, my conclusion was that while it’s too early to turn off the fiscal spigot, a plan to deal with government entitlements needs to be mapped out now. In this final installment, I look more closely at the assertion that corporate America has been paralyzed by political uncertainty. (more…)
We have seen something interesting unfold over the last month in the markets – signs of what we believe are the beginning of a Treasury breakout. Yields are starting to push through levels that have been fairly stable and steady over the last year. Our observation would be that we are starting to see a more secular move out of U.S. Treasuries and other high quality fixed income assets. (more…)
In my last “Bond Deer” installment the story of the investor caught in the risks of the bond market like a deer in the headlights I highlighted that a housing recovery might be responsible for pricking the “bond bubble.” But a self-sustaining recovery is still in its infancy and could easily be derailed.
Massive monetary accommodation averted a global financial collapse in 2008. Today, pundits are hotly debating whether Quantitative Easing (QE) in its various forms is still necessary. The pundits fall into three camps: (more…)
It’s the season to talk about the man who delivers presents. No, not Santa Claus, but Fed Chairman Bernanke who has been delivering the green stuff for the past four years – in a helicopter, not a sleigh… My last installment introduced the Fixed Income Bond Deer – the investor caught in the headlights confused about what to do. This week we contemplate the following: should “Bond Deer” be grateful for the green stuff or frightened by the possibility that it is fueling the next bond “bear” market? The answer: it depends on how long this experiment continues. (more…)
An insightful client exclaimed to me last week, after I had enumerated the many risks facing bond market investors, that he felt like a deer in the headlights. “Bear” with me for a paragraph or two while I elaborate. . . Imagine you’re a deer on a lonely stretch of highway late at night. To either side are high walls of rock (the psychologically difficult-to-scale barriers of asset allocation into equities). Behind is the long uphill that bonds have coasted on (with some bumps) for the past 30+ years. In front, coming closer every second is a set of large, bright headlights. Scary, huh? (more…)
A paradigm shift in financial markets has taken place since 2008 into a more volatile investment environment that will demand different ways of managing risk. In an ironic twist of intention, today’s higher volatility is the consequence of attempts by central banks to engineer a less volatile economic environment. This environment, one in which recessions are shorter/shallower and expansions stronger/ longer than they were in the early part of the 20th century, has its roots in the early 1980s and has spanned over two decades (read about it our “Blue” Paper titled, Living in a More Volatile Investment World.) (more…)
As the elections grow nearer, so does the fiscal cliff – the point early next year where tax hikes, debt limits and spending cuts will presumably converge.
- The debt ceiling. There appears to be an agreement, at least among key senators and congressmen, that the issue will be addressed after the election. The Federal Reserve and the Treasury also agree that we won’t have to deal with this problem prior to the first quarter of 2013. With this provision, the matter will be debated by the newly elected congressmen and senators in place, while outgoing congressmen will not have to deal with it and take extreme positions if they want to get a new term.
- Sequestration (expected cuts in programs), for which there has never been an agreement. This would cut rather indiscriminately across different segments of the budget, and amounts to about a trillion dollars over ten years, which is a fairly small number on an annual basis. The major source of cuts is going to be defense; the rest should be on discretionary spending. Both parties are eager to address this because neither is happy with how the cuts affect their particular interests. Sequestration would be a drag on GDP but might not be, in our mind, the largest source of concern for the market.
- Bush-era tax cuts expiration. We believe the expiration of Bush’s tax cuts would have the most potentially negative impact. This would lead to higher tax rates on all constituents, most notably on dividends and capital gains. We think it could have a profound effect on financial markets equity markets in particular as investors have been reallocating large portions of their equity holdings toward income-generating large cap equities. We think the increase in capital-gain taxes would hurt all those interested in buying risky assets. (more…)
Recently I was discussing the current investment environments in the U.S., Europe, China and Emerging Markets with a few of my Pioneer colleagues. The fact of the matter is, there haven’t been a whole lot of changes in the critical issues out there facing the markets, but I thought I’d provide a summary, just to keep things in perspective.
The other day while sipping coffee, I began to reflect on the news coming out of the recent EU summit. I won’t go into the details of the summit agreements – you’ll find them in some recent commentary by our Global CIO, Giordano Lombardo. Suffice to say that they appear to have moved the needle a bit.
I will, however, point out that while debt “mutualization” was not agreed upon, there was an about-face on the subordination of existing bank debt in the Spanish bank bailout plan. But wait a minute . . .capital injections into Spanish banks without strings? As the saying goes, if it walks and talks like a duck…
Ultimately, whatever form debt mutualization takes, it is in essence a form of monetary accommodation.