Bonds & Interest Rates
In a Flash, U.S. Yields Hit 1.6%, Wreaking Havoc in Markets
After weeks of grumbling, the world’s biggest bond market spoke loud and clear Thursday — growth and inflation are moving higher. The message wreaked havoc across risk assets.
Benchmark 10-year Treasury yields catapulted to the highest in more than a year at over 1.6% and traders yanked forward their opinion of how soon the Federal Reserve will be forced to tighten policy. Equities tumbled, as higher borrowing costs put pressure on soaring valuations. Even Treasury Secretary Janet Yellen felt the sting, with record low demand for a fresh round of government debt.
Speculation is building that a year of emergency stimulus is not only working, but has left some areas of the economy at risk of one day overheating. Locked in the same patterns for months by the Covid-19 crisis, markets now appear to have begun a long-awaited process of repricing themselves, as trillions of dollars of federal spending and positive vaccine results boost odds developed countries will heal faster than central bankers expected.
“The economy is already recovering and a lot of people think that this stimulus proposed is much more than what’s needed,” said John Carey, portfolio manager at Amundi Asset Management U.S. “You put too many coals on the fire and we build the fire to a very intense level. People start to think the Fed won’t be able to keep rates where they are.”
(Reuters) – Charlie Munger, the longtime business partner of Warren Buffett, on Wednesday warned that the stock market bears signs of a bubble, reflecting a “dangerous” mentality among some investors to gamble on stocks as they would horse races.
Munger, 97, lamented the recent mania for GameStop Corp, in which amateur investors encouraged each other online to buy the gaming retailer on platforms including Robinhood, and caught some hedge funds in a short squeeze.
“It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors,” he said.
“A lot of them crowd in to buying stocks on frenzy, frequently on credit, because they see that they’re going up, and of course that’s a very dangerous way to invest.”
Asked if the market resembled the late-1990s dot-com bubble, Munger said: “Yes, I think it must end badly, but I don’t know when.”
Munger was speaking at the annual meeting of Daily Journal Corp, the Los Angeles newspaper publisher he chairs, which was broadcast on Yahoo Finance.
He is better known as vice chairman of Buffett’s conglomerate Berkshire Hathaway Inc since 1978.
Munger said investors should not buy gold or bitcoin, noting the latter was too volatile to become a “medium of exchange for the world.”
He paraphrased author Oscar Wilde’s quotation about fox hunting to describe bitcoin, calling it “the pursuit of the uneatable by the unspeakable.”
Munger also expressed disdain for the surging demand for special purpose acquisition companies, or SPACs, which raise money from investors and then merge with private companies to take them public, in “blank check” arrangements.
“The world would be better off without them,” Munger said.
“This kind of crazy speculation in enterprises not even found or picked out yet is a sign of an irritating bubble,” he said. “It’s just that the investment banking profession will sell shit as long as shit can be sold.”
If you are placing your trust in markets on the ability of central banks and governments to invisibly/independently coordinate these powerful twin levels of fiscal and monetary policy – well that’s a big ask. Can the global economy really recover without fiscal and monetary policies being played harmoniously together? Can the global economy be redirected to address all the multiple challenges like climate change, income and social inequality, and the rest unless monetary and fiscal policy are used effectively by grown ups to lever economies?
I’m asking a rhetorical question – you know it’s happening, but you don’t know how effectively. That depends on the quality of government, and the quality of central bankers. Worries me. It should probably worry you.
Policy uncertainty is a key risk for markets. The big concerns come from the various factions of the market who perceive multiple potential policy mistakes – like runaway debt to pay for fiscal stimulus driven by “god-damn socialist” spending and tax programmes, or the debasement of currency though overly easy monetary stimulus. Much of that noise is politically driven – but if often rooted in common sense.
The temperature is rising. In the US, yields on long-term government bonds have jumped to the highest level since early 2020. Oil prices are rising, and copper is more expensive than it has been in almost ten years – clear signals that markets are bracing for a strong economic recovery.
Not so fast, says David Rosenberg. The internationally renowned economist and strategist from Toronto has no doubt that the pandemic will subside. But he also thinks that the post-opening growth spurt in the economy will soon lose steam and structural problems will resurface and reality sets in. «And then, we have to assess how these massive deficits and debts are going to be regressed, he’s warning.
In this in-depth interview with The Market/NZZ which has been edited and condensed for clarity, the founder of Rosenberg Research explains why he sees attractive prospects for commodities such as oil, gas and copper despite subdued demand. He’s also bullish on US banks. Globally, he sees the best investment opportunities in Asia, where the economy is benefiting from China’s robust growth.
Mr. Rosenberg, one year ago today, the global outbreak of the pandemic triggered the worst market crash since 1929. Since then, the S&P 500 has fully recovered and gained another 15%. What’s your take on the current state of the financial markets against this background?
Justin Smith shared some reasons investors might consider adding mortgage funds to their portfolio. Analysis on this new type of asset class, and why it is becoming so popular in this low interest rate environment.
Justin did a full presentation at the 2021 World Outlook Financial Conference on this topic. It provides more detail and recommendations, and we are able to offer it to our MoneyTalks audience for free… CLICK to Access and watch the video
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