Don’t mention the football No Mention Of The World Cup:
It’s June 2014 and I’ve promised not to mention the World Cup at all in this month’s bulletin. FAIL. In promising not to mention it I’ve immediately broken that promise by mentioning it, albeit with the best of intentions. Having broken the promise, let’s hope that England’s performances allow me to mention it again, in a triumphant way. I could make similar promises about not mentioning the ECB and their expected loosening of policy this month; the soggy equity performance this year so far; Japan and whether Abenomics has run out of steam; the question of how emerging markets can be expected to keep rallying in the face of a slowing China; or the prospects of bond yields going lower still; but if I did this would make this the shortest newsletter on record as no content would remain. Against this list of delights, talking about the World Cup, or even this year’s Eurovision Song Contest, may sound preferable.
The Widow Maker:
Not given to over-dramatising a phrase, my eye was drawn to a report issued by BCA Research entitled “The Widow Maker”. Was this referring to Scotland’s failure to qualify for Brazil (again) or perhaps conjecture on England failing to negotiate the group stage [You’ve mentioned it again]? 38│
Issue 3 � 2014
Neither, as it turns out. It is of course the name by which the trade goes of shorting Japanese Government Bonds (JGBs). An over-dramatised phrase if ever there’s been one but what does it mean? It’s relevant to much of today’s thinking about European bonds. The act of shorting JGBs has been a fruitless one for 20 years and more, but it is a trade to which some hapless investors have been drawn on a regular basis as yields have fallen over this period from 3% to 2%, from 2% to 1% and all the way through to their 0.6% yield today. A similar fate has befallen shorters of Swiss Government bonds too, whether they chose to short when they were 3%, 2% or 1% all the way through to their 0.75% yield today.
“The consensus is that China is an accident waiting to happen, yet emerging markets are still seen as the source of endless growth.”
What is the relevance?
There could not be a wider difference between the fortunes of the Japanese and Swiss economies over the past 20 years. Switzerland has thrived about as much as Japan has suffered, yet their bonds mirror one another. Why is this? The reason must lie in their shared experience of seeing low to no inflation in this time. And what is the fear underlying the calls to Mario Draghi to begin to do whatever it takes instead of simply saying he’ll do whatever it takes to save the - Business|Finance -
Andrew Merricks Head of Investments, Skerrits
Eurozone? It is the fear of deflation and the morphing of a European-style period of disinflation into a Japanesestyle period of disinflation. In the same way that those who shorted JGBs and Swiss bonds were expecting a “normalisation” of yields, so we hear today numerous comments about European and UK bond yields being close to the tipping point at which “normal” yields will be seen again. But what is normal? As a species we benchmark our expectations of normality against that which we recognise through our own experience, finding it hard to understand or grasp situations that we have had no knowledge of previously. In most of our lifetimes, and particularly our professional lifetimes, “normal” has been a multi-decade period of inflation, consequential high interest rates and a credit boom the likes of which has never been seen before. BCA refer to the period as the Great Aberration. As we can’t think of a better name, that’s what we’ll refer to it by as well. The 400 years preceding 1965 were typified by “credit growing broadly in line with the economy’s productive potential and (apart from during wars) structural inflation was nonexistent. And the lesson from Japan