Friday, August 19, 2016

A grim and timely warning

I'm glad to see that even finance industry mavens are seeing the light at the end of the tunnel, and recognizing it for an oncoming train.  The Telegraph reports:

The boss of a giant US hedge fund manager has warned his investors he now regards the global bond market as “broken” and expects price falls when they come to be “surprising, sudden, intense, and large”.

Paul Singer, manager of the $28bn (£21bn) Elliott Management Corporation fund, said investors were now facing "the biggest bond bubble in world history".

Prices of both government and corporate debt have been driven to new records as low interest rates and central bank responses, such as quantitative easing, have been deployed.

. . .

In a letter to his investors ... Mr Singer said the situation now “is in many ways the most peculiar period we have faced in 39 years".

He expressed amazement that investors would be willing [to] buy bonds at current prices.

He said: “Everyone is in the dark… Experience doesn't count for much, and extreme confidence may be fatal." He added: "The ultimate breakdown (or series of breakdowns) from this environment is likely to be surprising, sudden, intense and large."

There's more at the link.  You can read more of Mr. Singer's letter at CNBC.

I've been saying it for years, as have many other independent observers of the market.  Mr. Singer's warning comes as no surprise.  Batten down the hatches, folks.  When it happens, it's going to be a wild ride . . . and with the US presidential elections due in November, the markets might deliver an unplanned and very unpleasant 'October surprise'.


1 comment:

Eaton Rapids Joe said...

One other factor to consider is that pension fund managers are piling into the longest duration bonds they can find. (

They are doing this because longer duration bonds usually offer higher interest rates due to the necessity of offsetting inflation risks. The pension fund managers have a huge appetite for long duration and high risk investments due to the higher nominal returns. Also, they are trying to match the duration of their obligations with the duration of their investments which is absolutely silly.

The oldest piece of advice in banking is to borrow long and loan short. Since bonds are a form of loan, pension fund managers are placing themselves into a difficult position to defend, even though everything will be jolly as long as interests rates keep dropping or go negative.

They (and the folks expecting a full pension) will be in a world of hurt when interest rates rise, a possibility that becomes a near certainty as the currency is debased to pay for unfunded entitlements and The Deep State's wars.

The Central Bank's sleight-of-hand in money creation will be seen for what it is and investors will position themselves accordingly.