Eric Bushell's blog
June 19 marked the 10-year anniversary of the start of the financial crisis in the U.S. One week later on June 27, as Italy finalized the recapitalization of Banca Monte dei Paschi di Siena SpA, global bond yields began to rise in a synchronized fashion by 25–50 basis points (see chart). Despite inflation levels that remained below stated targets, central banks committed themselves to pressing ahead with an exit from the emergency monetary policies of the crisis period. A milestone in the crisis may have been reached. We had been waiting for European bank recapitalizations since 2009!
In the summer of 2016, Signature argued that markets were approaching a regime change. A multi-year deflationary impulse was fading and a reflationary turn was at hand. Commodity prices had stabilized and growth dynamics were improving along with financial conditions in the banking sector and credit markets. Populist political risks, exemplified by Brexit in late June, drove politicians worldwide to abandon austerity in favour of fiscal spending. Monetary policy alone was out of bullets but coupled with fiscal action wo
In August, Signature postulated that markets were at a moment of regime change from deflation to reflation. In fact we had discussed, over the preceding nine months, the need for asset allocators to prepare to tack away from the consensus deflationary scenario. The changing policy mix held the key to timing. If fiscal policy replaced bond purchases and negative rates as the policy mix – big asset allocation shifts would be required.
Last night’s election results remind me of the 1971 Monty Python album “And Now for Something Completely Different.” Donald Trump is president-elect of the United States.
The good news is that we have a clear winner with a clear mandate to “Make America Great Again.” Trump is the polar opposite candidate to President Obama. His election symbolizes the public’s frustration and determination to try something completely different, come what may. America’s middle class and blue collar Rust Belt are willing to run that risk, because whatever we’re doing now is not working for them.
At Signature, we have been max underweight exposure to equity since the summer of 2014 and we have been defensively minded since the beginning of former Chairman Bernanke’s taper in May 2013. This view changed in August. Now, three years and four months later, we are re-engaging risk. For the first time in this period, financial conditions in banks and credit markets are conducive to support growth in both emerging economies and developed economies.
I’ve had enough of the military analogies for unconventional monetary policy, bazookas and all that. It’s time for something new to freshen up this dull global deflation story. I just watched the clip from the movie Pulp Fiction where John Travolta plunges a massive adrenaline shot into an unconscious Uma Thurman’s chest and thought, that’s more like it!
Truly, it is more like it. Travolta marked his target with a red felt pen, wound up and delivered the hormone dose straight to the heart. It worked – an instantaneous recovery.