Wednesday, 13 June 2018 10:20

Blain: Will The Fed Hike Unleash The "Swing" Moment When Suddenly Balance Is Lost?

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Submitted by Bill Blain of Mint Partners

Fed, Stratospheric dangers, US corporate leverage and the greater competition to manage funds.

“Of all extinct life-forms, dinosaurs are the most popular. Why that should be is not clear… ”

All eyes on the Fed today. They will hike by 25bp to 2% – the 6th hike in 7 quarters. Slow and gradual. This is something of a one-off in terms of the economic environment – unconventional being the word. Easy financial conditions in terms of growth, inflation, jobs and the ongoing fiscal spending and tax boosts. Plus, we’ve got the positive sentiment effects of strong equity and real estate markets – when folk feel rich they feel positive! Plus plus, with the rest of the world still on negative or zero interest rates, then money continues to pour into Treasuries making the ballooning deficit a SEPT (Someone Else’s Problem Tomorrow). Asset prices are inflated, but still weakness in consumer prices and wages. This remains an “interesting” space in terms of the potential policy pitfalls, and the “swing” moment – when suddenly balance is lost and the centre cannot hold...

Perhaps the writing is already on the wall? I was slightly concerned to read the National Federation of Independent Business (the US SME organisation) believes: “Main Street optimism is on a “stratospheric trajectory” thanks to recent tax cuts and regulatory changes”. Stratospheric is often confused with ballistic. Stratospheric could mean its’ going into orbit, or simply that a ballistic launch will reach the stratosphere. Sadly, ballistic means the kind of trajectory Kim Jong Un claims to no longer be interest in…`

(Last time someone was talking “stratospheric” it was in relation to Bitcoin, and that’s not ending well. Final comment on ballistic trajectories….I note a headline about Telsa slashing salaried staff.. )

Market mood this morning feels a little subdued. The judgement on yesterday’s gabfest in Singapore is Trump grandstanded and got very little in return. Perhaps, Donald is not the statesman he thinks he is?

Next week, Tuesday 19th I’ll be debating the markets at the Euromoney Global Borrowers and Bond Investor Conference at the Hilton in Hyde Park London. Its’ the largest and longest established event of its kind. I’ll be proposing the motion: “this House believes that every security is currently overvalued”. If any readers are attending, I’ll be looking for your support! (Any ideas gratefully accepted on how I win this thing….)

There is a lot of negativity out there. Yesterday I wa s reading about Euro buyers are pre-empting the end of the ECB’s corporate binge buying programme – (I don’t think so!) - and we’re already seeing it reflected in prices. This morning, its’ an article in the FT telling us, quell surprise, BAML has noticed: “Fund Managers are getting twitchy about corporate debt.” A “No Sh*t Sherlock” award for services in spotting the bleeding obvious is winging...

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