Topley’s Top Ten – October 16, 2017

1.Stock Bubble? $8 Trillion in Bonds Outstanding have Negative Interest Rates.

Torsten Slok

Sometimes clients ask me “Where is the bubble in financial markets?”. I think the answer to that question is easy: It is the red area in the chart below. $8trn in global debt is trading at negative interest rates. Think about it; almost a decade after the financial crisis we still have $8trn in bonds which yield negative returns.

It is the unattractiveness of these bonds for investors which is the biggest bubble in markets today. These $8trn in negative yielding assets have forced investors around the world into all kinds of other asset classes such as IG credit, loans, mortgages, HY bonds, equities, and even emerging markets fixed income and equities.

The Fed running down their balance sheet by a 50 billion here and $50 billion there is not going to make a difference to this chart. The real test will be when the red area in the chart below turns black. When these $8trn suddenly begin to yield a positive return how are global investors going to react? The fear is that when the risk-free interest rate goes higher then credit spreads will widen and equities underperform as investors leave risky assets and come home to higher-yielding government bonds. In finance terms, if the risk-free rate goes higher why should I then be buying risky assets?

When will this bubble burst? It will happen the day we begin to see inflation in the US. Because higher US inflation will mean more and faster rate hikes from the Fed, which will mean higher rates globally, including in Europe and also Japan. The good news is that consensus doesn’t expect US core inflation to move higher until 2018Q2. The bad news is that the $8trn in the chart below shows that investors don’t believe we will ever see inflation again. The bottom line is that the central bank exit has barely started and once inflation does start to move higher then checking out from Hotel Easy Money will be a lot more difficult than checking in.

Torsten Sløk, Ph.D.
Tel: 212 250 2155

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Topley’s Top Ten – October 11, 2017

1. Eurostoxx 50 …Close to a Break-Out Level that Goes back to 1999.

Here’s where things get interesting. The monthly chart above shows the Euro STOXX 50 has broken above its long-term trend, but the weekly chart below shows us that the breakout hasn’t happened yet. This is why it is important to look at varying timeframes.

Given various global markets are already breaking out, it is likely only a matter of time until the Euro STOXX 50 breaks out above this trendline. Per Ryan Detrick, Senior Market Strategist, “Though when looking out into 2018 we continue to see better opportunities domestically and in emerging markets, Europe is finally pulling its own weight. This is yet another sign that we are amid a global bull market and it should continue into 2018, if not further.”

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Topley’s Top Ten – October 10, 2017

1.The Cycle to Watch Growth vs. Value….Growth is Hitting Record Spreads Versus Value.

As the domestic equity market has appreciated this year, performance has been led by companies in the traditional growth style sectors, such as information technology. The value style has lagged, which results in interesting price dispersions that can create opportunities for investors.

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