If we have to highlight one reason why we enjoy Albert Edwards' truly contrarian work as much as we do, it is for, among other things, self-deprecating humor such as this: "As an uber-bear I am used to being called a stopped clock. By contrast the market embraces a bullish forecaster however often they are shown to be overly optimistic... The market doesn?'t care that the IMF has been serially wrong and that its forecasts resemble a series of hockey sticks" (as we showed here).
That, however, is not the reason we point out an interesting point Albert brings up in his latest note titled '?Basket trade?' suggests "Sell everything and run for your lives” (which has nothing to do with Edwards being a correct permabear in a world in which the house of cards is kept standing day after day only thanks to over $10 trillion and rising in central bank liquidity, and everythning to do with this). The point is whether increasing volatility across all major asset classes (notably FX and increasingly so in equities) will finally spill over into bonds, but in an inverted way - one where unlike stocks where vol surges when prices crash, would see bond volatility soar as a result of matched surge in bond prices, something which as we showed earlier today is becoming an increasing concern as bond yields around most places in the world have tumbled to record lows.
- IRELAND SELLS 10-YEAR BONDS AT RECORD-LOW YIELD OF 1.63%
- GERMAN 10-YEAR BUNDS RISE; YIELD FALLS 2 BASIS POINTS TO 0.88%
- DUTCH 10-YEAR GOVERNMENT BOND YIELD DROPS TO RECORD-LOW 1.021%
- PORTUGUESE 10-YEAR BOND YIELD DROPS TO RECORD-LOW 2.942%
- FRENCH 10-YEAR GOVERNMENT BOND YIELDS DROP TO RECORD-LOW 1.214%
- U.S. 10-YEAR NOTE YIELD DROPS TO 2.296%, LOWEST SINCE JUNE 2013
- SPANISH 10-YEAR BOND YIELD DROPS TO RECORD-LOW 2.038%
- FINNISH 10-YEAR YIELD DROPS TO 1% FOR FIRST TIME ON RECORD
So without further ado, here is Albert "uber-bearish stopped clock" Edwards:
Given that once upon a time, I could actually do maths, I can sort of understand the concept of volatility (or vol as the practitioners like to call it!). I can understand what VIX is, as I can physically calculate something very similar myself using the 90-day standard deviation of daily S&P changes, which I am told is called realised vol (see left-hand chart below).
What I have never really been able to understand is why vol only rises when the market declines (see top right-hand chart above). But the chart and maths tell me that markets must rise in a smoother way than they decline - the latter being violent and often disorderly as years of gains are often wiped out in a few months.
I was chatting to my former colleague Helen Thomas who writes in her Blonde Money blog how ?"volatility is eating itself?", i.e. the rise in FX volatility is feeding into higher equity market vol. Helen believes that the missing part of the puzzle has been bond market vol, which has been relatively well behaved. It remains the overwhelming view of the market that US bond yields will rise ? see for example “Stick with consensus and sell Treasuries” ?- link. I discussed with Helen whether bond vol may indeed rise sharply, but in a way that equities never seem to do - in line with prices on the upside as higher FX vol sends equity prices lower. Blonde Money also points out a short study by the New York Fed which notes that when markets watch one another, this can cause volatility to propagate.
This reminds me of one of Andy Lapthorne?s constant refrains in presentations, namely that "corporate bond spreads are a function of VIX via the Merton Model?." Again I have no idea what he is talking about except that there are a set of dominos out there and when they start falling the whole lot could come tumbling down. Of course a key prop preventing this cataclysm remains the US economy- probably the only region where investors still have confidence in a self-sustaining recovery.
Which is hardly the case after yesterday's FOMC commentary, in which we learned the Cafed Crusader is now tasked with fixing not just the US but the entire global economy.