No Sense of Urgency — Incredibly — As Bond Crisis Deepens
Author: Greg Valliere
August 29, 2019
STAGGERINGLY LOW BOND RATES — the French 10-year yield is minus 0.415%, for example — are sending an urgent signal to world leaders: massive stimulus is needed immediately to stave off recession. Yet, incredibly, there’s no sense of urgency on the policy front.
EVEN LOWER YIELDS are likely as investors seek safe havens in the face of several looming crises: a chaotic U.K. Brexit, which is almost certain to depress the economy there; growing fears that China will crush the insurrection in Hong Kong; and the U.S.-China trade dispute, which isn’t close to resolution.
THE MADDENING ASPECT OF THIS is that global leaders agree that something must be done, but they’re in no great rush. The European Central Bank will meet on Sept. 12 (they could have scheduled an emergency session this month, but vacations beckoned). There will be agreement, even from Germany, on a higher inflation target, but that will require dramatic monetary and fiscal stimulus.
AT LEAST DONALD TRUMP UNDERSTANDS that avoiding a recession (and a re-election defeat) requires massive stimulus, but will it come fast enough? The Federal Reserve will move gradually, and while fresh spending is coming, U.S. tax cuts look unlikely.
A SLOW MOTION TRAIN WRECK: As this unusual summer comes to an end, it strikes us that the greatest global concern is nowhere close to resolution. Officials in the U.S. and China can’t even agree on whether they communicated last weekend; Trump says yes, China says no. They still haven’t agreed on the location or dates for fresh talks. Even if they resume negotiating, a deal is months away.
LIKEWISE, MARKETS WILL HAVE TO ENDURE months of more uncertainty on Brexit, as the political chaos intensifies after Boris Johnson’s bold move yesterday. With no resolution until late October, negative bond yields in the U.K. — unthinkable just weeks ago — are possible. Could the pound hit parity with the dollar? Unlikely but not out of the question.
A GREAT IRONY: Despite Trump’s un-hinged tweets and erratic behavior, the U.S. may be the safest investment haven in the world, with a strong labor market and GDP growth of about 2% — more than double the Western European pace. But even here, the dramatic yield curve inversion is a warning signal.
AN EVEN GREATER IRONY is that two solutions are in plain sight. First, emulate the Chinese — prime the pump with massive Keynesian stimulus; don’t worry about inflation or bubbles. And second, lock Presidents Trump and Xi in a room, and don’t let them out until they have a trade deal.
BUT THERE SEEMS TO BE NO RUSH — except by bond traders, scrambling to lock in negative yields before they plunge even more.
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