Some well-timed observations from Bloomberg's Richard Breslow.
Infinity And The Bond Market Wormhole
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The infinite loop continues.
Central banks ease, cajole, fluff up their feathers and push markets to where they don’t belong. Markets try to reprice themselves closer to normalcy (sanity). Central banks see their main equity index fall and panic. Central bank pushes more chips in and everyone has to cover. Central banks declare victory. Smart investor sells.
It is so utterly appropriate that in the definition of infinite loop on Wiki it is pointed out that a synonym is “unproductive loop."
Like any table stakes game, running out of wherewithal is a killer. What if the other player doesn’t value the keys to your car? It certainly feels that way when debating how clever it would be to juice inflationary expectations by increasing the inflation target, which will ignite the animal spirits of the economy, even though (wink, wink) we will pull back before it becomes a problem.
Another conceit being floated -- by the same central bankers who get night sweats thinking about the day after they raise rates some nominal amount -- is that their communication strategy has been so straight-forward and consistent that surely markets and the banks are on the same page.
Yes, it will be a “regime change,” but surely we are all seeing and evaluating the data the same way. That is code for, we don’t have a clue either, but we desperately can’t threaten the wealth effect of higher equity prices. This supposed wealth effect is used to celebrate (see a chart of Chinese equities) what in an alternative universe would be viewed as a bubble.
Bonds are down because they are overpriced. They use the elevator rather than the stairs because the conceit of getting out right before it gets ugly never works unless there is massive official support, but even that is not always enough, let alone appropriate.
The numbers out of Europe have been getting better. 1Q growth in Europe was better than in the U.S. or U.K. QE is working and the economy is building momentum. So explain to me again why 10-year rates should be negative? The EUR is up over a percent this morning. That may look nice, but that is precisely what they don’t need and shouldn’t want. Let the rally continue and we can dust off the negative yield talking points.
