Heisenberg Report

The Ride Of The Valkyries: SocGen’s Juckes Has Visions Of ‘Bond Vigilante Gun-Ships’

In a speech to lawmakers on Tuesday, German Finance Minister Olaf Scholz attempted to walk the fine line between suggesting that Germany could deploy stimulus in a pinch while simultaneously underscoring a commitment to almost religious fiscal rectitude.

Although Berlin will stick to its infamous “black zero” policy, the government is prepared to spring into action with “many billions” in the event the world’s fourth-largest economy careens into recession.

“It’s solid and is being achieved without new debt”, Scholz said of next year’s budget, adding that “it’s an expansionary budget that includes much investment.”

Read more: Germany’s ‘Black Zero’ Fiscal Policy Called ‘Voodoo’ As Economy Screams For Stimulus

Scholz previously floated the idea of a €50 billion stimulus package. The government has come under fire over the past several months for its perceived recalcitrance in the face of a worsening manufacturing slump that shows no signs of abating. Despite being able to borrow for free, Berlin is reluctant to countenance the idea of massive stimulus if it means blowing a hole in the budget.

Whenever global bonds have taken a break from rallying over the past five weeks, those looking to call a bottom in yields generally point to the prospect of fiscal stimulus from Germany as a possible catalyst for a turning of the tide. German and US yields have risen of late, leading to questions about whether the retrace higher is a head fake or the real deal, so to speak.

For SocGen’s Kit Juckes, the last several days do not represent a turning point.

In a short Tuesday note, he begins by saying that Frances Coppola’s “The case for People’s Quantitative Easing” is at the top of some folks’ reading lists this summer – Albert Edwards apparently just finished it.

“Now I can’t stop humming The Ride Of The Valkyries, while imagining bond vigilante helicopter gun-ships laying the market to waste”, Juckes quips.

After spending a half-hour watching Lt. Colonel Bill Kilgore clips on YouTube, Kit snaps back to reality. “This is a correction to an outsized move in yields during August, not a turn in the trend”, he says, adding that “last Friday’s US labour market data show, clearly enough for me, that the US economy is slowing slowly but steadily as the global trade slowdown infects it”.

That’s probably true, although the services sector still hasn’t gotten the message (green line in the top pane).

Juckes goes on to say that while the US is, to a certain extent, insulated, Trump’s economy is “not immune and it can’t rely on the equity market to bail it out for ever”. In the end, Juckes says, “the world will drag the US economy down and Bund yields will drag Treasury yields lower”.

As a reminder, Bunds have been “the largest source of the cumulative bullish impulse to the global rate rally this year”, according to Goldman’s math.

And what of fiscal stimulus rumors from Berlin?

Suffice to say Kit is skeptical.

“But if you really want a sight of vigilantes in action, let’s see what happens in Berlin”, he writes, before cautioning that although “there are mutterings of easier fiscal policy again, we’ve had these before and even if [it] materializes, odds are it will be more a toy drone helicopter than a fully-fledged gunship”.

Coming quickly back to Scholz, he said Tuesday that “it’s central” for Germany to be in a position to “respond with many, many billions, if indeed an economic crisis erupts in Germany and Europe”.

“And we will do it”, he promised. “That’s Keynesian economics come alive, if you will”.


 

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