Ok, well former trade Richard Breslow is closing out the week on an upbeat note, although today’s missive retains his trademark skepticism towards how everyone else is looking at things.
And indeed that’s his point on Friday: despite post-crisis tights in credit spreads, near-record high equity prices, and mounting evidence that, lackluster inflation notwithstanding, the global economy may be finding its footing, everyone is still looking for the proverbial canary in the coal mine.
What you’ll read below is actually an extension of Breslow’s Thursday note, in which Richard suggested that the subtle upward revision to the Norges Bank’s rate path was actually more important than it seemed. It was, simply put, just the latest evidence to support the contention that central banks are embarking on a coordinated effort to normalize.
That effort could be inspired by a brighter outlook which is what Breslow wants to suggest on Friday. Of course it could also be inspired by a desire to let the air out of asset bubbles and free up some countercyclical breathing room so policymakers have some ammo when the next crisis finally does come calling.
Whatever the case, Breslow’s notes are always worth reading and today’s is no exception. Do note his comments on the curve, which has been the subject of considerable debate (see here and here, for instance) over the past several days.
Those great PMI numbers from Europe this morning aren’t just a euro-zone story. They are part and parcel of a global economy that continues to heal. Maybe, at this point, given the breadth of improvement, we can allow ourselves to be even more upbeat than that. How many central bankers need to suggest that the tide is turning before we believe them? And yet, I almost feel like I’m being an iconoclast by choosing to take a sip from a glass half full.
- But I’m not as alone as people would like to make out. Sure, lots of smart people are very leery of the equity markets. They’ve been acting more like widow- rather than career-makers. On the other hand, for everyone who tells me to avoid the S&P 500, there’s a phalanx of boosters for emerging markets amid all the bright news. You can’t have developing economy markets continuing to outperform unless the rest of the world is providing positive reinforcement. Rotation is not synonymous with get out of everything
- The relentless flattening of the yield curve has definitely unnerved folks. It is indeed a fascinating phenomenon. But this may be one of those actual examples where past implications don’t necessarily ensure future outcomes. I do subscribe to the portfolio construction argument that says the thirty-year is a cheap and prudent hedge for everything else you’re holding. And you have to admit, that it’s worked like a charm. That’s what models see. The time series they use have decayed those ancient experiences of an inevitable recession into virtual non-existence. And only time will tell
- Besides, if the direction of rates has to be led this time by the five-year, so what? One thing I do know is rates in one locale are contagious for other markets and for inflationary expectations. You might not like that, but it’s true. Tapering is going to be a hugely interesting experience with central bank tenderness being the only counterweight to the natural forces of supply and demand
- We do live in a world always searching for that elusive canary in a coal mine. I do it too. But sometimes that bird is singing a solo that’s meant to reassure not forewarn. Yes, spreads in the low end of the commercial mortgage-backed market have noticeably widened out. But that’s been the Amazon story being priced into things. High-yield everything continues to perform like champs. The bird is telling you a little selective differentiation is healthy, not necessarily a precursor to imminent demise
- Do geopolitics still depress me? Of course. But it would be hard to argue that, with the possible exception of the Korean peninsula, things aren’t marginally better than earlier this year. And while I got numerous questions yesterday about how seriously I feared a war before the weekend, I pointed out that equities “only” being flat on the week isn’t a sign of outright panic. These things aren’t day-tradable. Just ask market-makers in the won
- I was following the commentary after this morning’s numbers and got the feeling that there was relief. It gave traders an excuse to re-sell the dollar, which is something we’ve been conditioned to do, because it was legitimate to re-buy the euro. This sort of two-way interest is healthy. There can be an upbeat message to take away