In yet another parenting “What the heck just happened moment?” my daughter asked last week, “Can I redo my bedroom?” I asked, “Why? I love your room.” She said, “I want it to be more mature.”
What the heck! She’s nine!
One minute I was moving stuffed animals out of the way to tuck her into bed and the next minute we’re selling her dollhouse to put in a desk.
To be clear…I don’t like it at all. That said to deny the reality of the situation would be pure lunacy.
Even though I never once pondered the sad day I would be taking down her My Little Pony wall decals eventually I knew it was going to happen.
The horse has left the barn. Hah!
Life is a perpetual instruction in cause and effect. - Ralph Waldo Emerson
While the cause of my daughter’s pivot is clear to all, “My baby all grows up” we believe the global market’s pivot toward an environment unlike the previous nine years is occurring as well: a pivot whose cause has been nine years in the making. In 2008 our Fed took rates to zero and began QE bazillion in an effort to create inflation and lower unemployment.
Over the next few years we wrote about the ensuing perpetual game of “around the horn” that prompted other central bankers around the globe to race to zero/negative interest rates while pounding their chests in unison to emphasize the ginormity of their growing balance sheets.
The built-up effects have been numerous and quite often perceived as riskless.
After all, the trillions of currency printed globally created a perceived floor to asset prices along with an implicit belief that rates would never go up. As our genius PhDs kept reminding us; the lack of inflation was a mystery.
So debt was accumulated everywhere and the idea that the stuffed animals were going to remain on the bed forever kept everyone complacent and cuddly.
That said, just last year we cautioned our readers regarding every aspect of the Trump agenda and how every single one of his economic proposals was inflationary.
We cautioned investors on emerging markets and the enormous amount of debt that had been accumulated due to the unquenchable thirst for yield.
We also warned investors about cryptocurrencies and outright short volatility funds and ETFs during the lowest volatility period of all time.
So when the February inflation and wage growth data appeared only then did the path of higher rates in the United States finally become a genuine possibility.
The thinker makes a great mistake when he asks after cause and effect. They both together make up the indivisible phenomenon. - Johann Wolfgang von Goethe
As such we believe the complicit nine year-old interior decorator/banker that we have all loved so much has shown up seemingly overnight to pivot markets and generate volatility.
“Around the horn” as it once related to the race to the bottom for interest rates everywhere has reversed direction as markets and bankers contemplate…and panic…about the real possibility of interest rates not staying low forever. Oh the horror!!! Pretty simple really: inflation creeps up, rates creep up, the dollar creeps up.
That’s a whole lotta creep out there for those accustomed to zero volatility and levered, seemingly risk-less returns.
As evidenced by the recent collapse in the emerging markets other central banks in turn have had to manipulate their currencies to counteract the imported increase in commodity prices and inflation by the US.
As example, just this month India, after inflation surpassed its target for six months running, finally raised rates for the first time since January 2014.
In Indonesia, their Central Bank Governor while impersonating a sobbing father recognizing something had changed said this last week, “We know every country must decide their policy based on domestic circumstances but look, you have to take account of your actions and the impact of your actions to other countries, especially the emerging markets.”
Are you being serious?! Oh how things can change in an instant: especially when you are so accustomed to those cuddly, cute, benign stuffed animals slowly accumulating to the ceiling!
Nobody ever did, or ever will, escape the consequences of his choices. – Alfred A. Montapert
We have long written about the knock-on effects of nearly 10 years of money printing, suppressed interest rates and the resulting belief that it was totally normal and riskless.
The fact that anyone is shocked that the US raising rates is causing knock-on effects is amazing to us. In March 2016 we wrote about the number of major central banks raising rates globally.
That number has nearly doubled today.
In 2018 of a list of 26 major central banks there have been 9 rate moves: seven have been up including the US, Korea, Great Britain, Canada, Czech, Mexico, India, Saudi Arabia and Turkey.
Deflation being exported all over the world forever was an amazingly long-lasting convenient story.
Could inflation and higher rates be exported around the globe as easily without any volatility? Hmmm…great question.
My guess is we will be addressing that one in various, yet to be discovered forms pretty soon.
Stay hedged.
