It's shaping up to be Albert Edwards' year, if not decade and century.
Three years after the stock of global debt with negative yields hit an all time high just above $12 trillion, the NIRP trap is back, and the amount of sovereign debt sporting a negative yield is just shy of all time highs, hitting $11.7 trillion today according to Bloomberg, nearly double where where it was just last September.
Of course, that this is taking place with the S&P500 just a few percent off all time highs is the reason why traders are having nightmares - this does not happen when everything is hunky dory in the economy, and in fact it is an indication that risk assets are overinflated only for one reason: expectations that the Fed will step in and "rescue" risk assets.
This is also a nightmare for the Fed, because - in a reflexive feedback loop - with the S&P near record, unemployment at all time lows, and wage inflation near the highest it has been since the financial crisis, the Fed will be hard pressed to justify a rate cut at this time, and not be accused of having turned political, and easing only to placate President Trump who has repeatedly stated he is unhappy with the Fed's "high" rates. Which is also why as Jeff Gundlach sayd yesterday, next week's FOMC decision will be especially interesting, why the potential for a huge disappointment is present if the Fed does not sound nearly as dovish as the market expect it to, and why Powell will be eager to keep the press conference as short as possible.
What is striking is that even though a rational person would certainly brace for a hawkish surprise - as that would immediately result in the "max pain" scenario in which everyone is forced to reverse hawkishly - the market refuses to do so, and as BofA's Michael Hartnett shows in his latest weekly "flow show", in the past 6 months there has been a record $47bn inflows into government bond funds...
... and more notably, a record $306bn divergence between equity & credit flows YTD.
More tactically, institutional S&P500 open option interest flipped from -$446bn to +$333bn in the past week as investors covered short positions, seemingly expecting an even more dovish surprise by the Fed!
Meanwhile, in another startling observation from Hartnett, the Chief Operating Officer writes that "highly-anticipated events in recent years (e.g. Shanghai G20, Brexit, Trump) have typically coincided with big unwinds of crowded positions; and "Japanification" rate theme max consensus." As a result, the collapse in global inflation breakeven levels have taken global govt bond yields (ex. UST) to a new all-time low of 1.2%.
Finally, where there is a clear disconnect in fund flows between stocks and bonds, Hartnett claims that there is no disconnect between bonds & stocks in terms of risk appetite as corporate bonds drive absolute equity returns, and at this moment credit returns are at record highs, while government bonds are a better driver of relative equity performance, and the all-time lows in government bond yields shown above are coinciding with all-time highs in the ratio between growth and value stocks.
In other words, there is a growth bubble (as value investors go extinct), and it is all a function of the Fed and central banks once again throwing in the towel and turning uber dovish once again the what may be the last race to the rate/currency bottom... perhaps ever, if as Pimco speculated, this will all end with the Fed losing control over the market.