Rondonomics

"If something cannot go on forever, it will stop" - Herbert Stein Ten years ago this August, the French bank BNP Paribas froze three funds exposed to US subprime mortgages, an event many consider to be the beginning of the financial crisis. In "celebration" of the 10 year anniversary, I wanted to share some concerning observations from global fixed income markets: Since the beginning of the year, the yield curve has flattened  The 2s10s treasury spread went from 125 bps to 87 bps today The Fed dot plot implies 1 more 25 bp rate hike in 2017, and 3 more 25 bp rate hikes in 2018  That makes 100 bps over the next 16 months, the long end better go up.... Flattening yield curves usually precede recessions Global Debt is a 325% of GDP Corporate Debt levels are 30% higher today than in 2008 Corporate Debt to GDP is at its highest point in history NACM (National Association of Credit Management) have cited deteriorating credit conditions since 2014 The IMF re...

As the US recedes from the global stage as guarantor of world order, individual nations must fill the security vacuum and increase their own defense spending as various forces challenge global security in the years to come. After WWII, the forces of technology and globalization unleashed profound changes on global governance and economies. The Great Recession, income inequality, and erosion of trust in key institutions have poured fuel on the fires of nationalism and populism. Costly and ineffective wars in Iraq and Afghanistan have diminished American willingness and ability to project power abroad. These factors and events have hollowed out alliances that maintained peace among great powers during the post WWII era. To quote a report published by the Eurasia Group in September 2016:  "The end of governments' monopoly over politics isn't the only factor making the world messier. The very alliances that underpinned international relations in the post-World War II e...

The Fed recently eluded to the "normalization of its balance sheet" or quantitative tightening. The Fed has communicated this tightening will commence "relatively soon" potentially while short term interest rates are still in the hiking phase. I find this perplexing. The Fed's dual mandate is employment and inflation. Employment likely cannot go much lower, but the lack of significant wage pressures give comfort that the labor market is not overheating. Inflation is barely approaching the 2% target, and with the exception of a few years in the mid 2000s, has been at 2% or below since the early 1990s. Technology and globalization have smoothed out inter-regional economic links and muted inflation's effects in developed markets. If anything, growth expectations in the US have come down since the beginning of the year. One could even argue there is little justification for interest rate hikes in general (although this is not my opinion). The Fed has proven adep...