Quotes of the Day: Concerning Trends and Under-The-Surface Stressors

Be it via Fed policy, or fiscal manipulation (per below), when the powers that be attempt to undo the negative consequences of their own actions (without undoing those actions themselves), well, history has proven time and again; that’s how debt-fueled asset bubbles are formed.

Mizuho’s bond strategist has it exactly right:  emphasis mine…

“Issuing ultra-long debt is “under very serious consideration,” Mnuchin told Bloomberg News on Wednesday. While the benchmark 30-year yield rebounded from an all-time low and the U.S. yield curve steepened following those remarks, much of those moves reversed early in Asia trading Thursday.

Mnuchin “might have tried to lift long-dated yields given that the yield curve inversion is seen as a sign of recession,” said Hidehiro Joke, a bond strategist at Mizuho Securities Co. in Tokyo. “There was no need for Mnuchin to make remarks that could prompt selling of Treasuries. Yields will struggle to rise” due to the U.S.-China trade conflict, he said.”

While these indeed seem like unusual times (the U.S. issuing “ultra-long debt”, for example), per below, there is precedent. 

And while I absolutely believe that the jury’s still out on how — and how deep — the present (and longest ever) expansion and bull market will unfold into its demise, present trends, and under-the-surface stressors, have me concerned.

Here’s Ray Dalio, one of today’s most-respected market and economic historians, and manager of the world’s largest [and now history’s most successful] hedge fund:  emphasis mine…

“In other words now 1) central banks have limited ability to stimulate, 2) there is large wealth and political polarity and 3) there is a conflict between China as a rising power and the U.S. as an existing world power. If/when there is an economic downturn, that will produce serious problems in ways that are analogous to the ways that the confluence of those three influences produced serious problems in the late 1930s.”

And here’s yours truly, from three weeks ago, on one of those under-the-surface stressors that has my attention:

“The concerning corporate debt picture – in terms of level (record) and the credit tranche where much of it sits (BBB: Which will spark huge disruptions as portfolios and funds mandated to hold only investment grade debt unload [BBB is the lowest investment grade rating] when the economic slowdown forces credit downgrades) – government debt levels, low tax revenues due to recent tax cuts (making fiscal stimulus a challenge) and the fact that the Fed is grossly ill-equipped at this juncture, strongly suggests that the next recession, be it within the next year or further out, will morph into something deeper and longer than the norm.”


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