Looking in crystal balls for future answers is as good as anyone’s guess, but what are the facts on hand. Former fund manager Sunil Shah takes a look at the United States story and highlights a worrying fact – the 10-year US Treasury yield is close to breaching its record low in 2012, back when the investment mantra was a ‘flight to safety’ after the 2010 global recession. And a deeper concern for Shah – what would the yield be if the US Fed hadn’t purchased $5 trillion worth of various government instruments over the past 6 years? This coupled with a presidential race, which looks more like a race of the best loser, and jobs data which is not reflective of what’s happening on the ground. And one should remember, a country’s currency is always a good measure of its economic health. And while Shah admits to not knowing where the economy is heading, the picture being painted is not of sunsets and piña coladas. – Stuart Lowman
By Sunil Shah*
Long bond yields are heading to unprecedented lows, reflecting the paucity of economic growth and inflation, but also the higher systemic risks in these turbulent markets.
We are close (and threaten to breach) the record low in 2012 for the 10-year US Treasury Yield, in the aftermath of the Great Financial Recession of 2009, when the mantra was flight to safety, when even AAA non-bank corporates were regarded with deep suspicion and the world financial system seemed on the brink of collapse:
But the current shift downwards is more ominous, and indeed more mysterious.
Foreign investors must surely be assuming higher sovereign US risk, with ever escalating public debt and significantly higher dollar vulnerability. Granted trade surplus countries are less worried about a profitable trade than recycling those surpluses to maintain their competitiveness, but how much of this move is the U.S. buying its own dirty laundry (i.e. quantitative easing)? And what would the 10-year yield be if the Fed hadn’t purchased $5 trillion worth of various government instruments over the last 6 years?
It could carry on, but…
But a swirling still-unarticulated unconscious (named Swami) says this will end very badly. And that Swami’s voice lurking deep within has never erred (well… hardly ever).
So the dress party continues, carnival guises de riguer. Asia smiles sweetly in her kimono and pumps more money at treasuries. The Fed bows graciously (and perhaps more reverently each time!), accepts the loot, and dances a flamboyant rap-groove-twirl, to remind the upstarts who is actually le beau de la balle! Dammit!
But back at the ranch (U.S.), there are louder voices screaming their anguish at the lack of jobs. “I can live with negative equity, but hell, it’s been 12 months without a pay check! And no! I wont flip hamburgers – I have a diploma in Film Studies!”
The ranch politicians are frantic. Their soothing rhetoric (expressed from under large Texan hats, so lip movements are concealed) that used to allay the crowds now fall on deaf ears; jaded by unfulfilled promises, un-rejuvenated wardrobes and smaller hamburgers, the masses unite in protest. The politicians try – hard – to reconcile their role as the global leader of free market capitalism, and the fact they get pelted every time they go to Wal-Mart. Eventually… Eventually they choose: Anything but another ripe tomato hurled by an unemployed angry citizen at Walmart.
The protectionist barriers rise faster than Trump’s litany of gaffes or Hilary’s deceit… Within weeks Fortress U.S. is sealed. There was no other choice, you see. We’ve been beaten at our own game, the game where we made the rules. We either accept that, and we can’t, or we have to change the rules. That’s when the global symbiotic relationship that has prevailed of recent begins to unravel. And fast. Just this week Japan announced a change in their QE program (to shift buying to shorter dated government bonds, from longer, leading the most ferocious selloff in JBG bonds in 2 decades). Offshore Japanese money is bound to migrate onshore, with global market possible consequences…
And where that takes us, the Swami hasn’t told me yet. I don’t think even he knows. But he did say, “Watch the dollar. In this world of complex symbiosis, things are not always what they seem.”
- Sunil Shah regularly contributes to Biznews. He was a fund manager and strategist for Coronation Fund Managers until 2004. He left the corporate world to write his novel, White Man’s Numbers, a fictional tale of the rollercoaster lives of four characters in the world of fund management. Sunil currently runs his own money in a highly concentrated US fund.
