This has not been a month for whimsy. I sit here and write to the background hum of rain pouring on the conservatory. An autumnal late August and one that may augur badly for what beckons. Perhaps we may about to see that last of the phony war, peppered with the forgettable rhetoric of both sides: the Austerians versus the Stimulants. Cut back or let loose!
Two years ago, Lehman Brothers fell over after a series of dominoes in the marketplace. A surfeit of debt destroyed confidence, as certainty was replaced by doubt. That certainty has never been recovered. It has been masked by the final backstop: government spending. This final redoubt is also shrivelling as the tides of doubt erode the cliffs of monetary sovereignty.
The first intimations formed the easiest targets: governments within fixed currency regimes where the assumptions of debt and repayment have been retuned in line with the collapse of certitude. AEP notes that the debt avalance of pensions have been brought forward by twenty years, rerating the goldplated credibility of the West. The weaker members of the convoy are already trending towards junk:
As Moody's said this week, the Great Recession has made sovereign debt
suspect. "The burden of proof now falls on governments". Events
have "fast-forwarded history", ripping away the 20-year cushion we
counted on before the "adverse debt dynamics" of our aging crisis
hits home.
Two epochal forces are colliding in the global bond market: core deflation is gathering force but the West is losing sovereign credibility just as fast.
Arch-bear Albert Edwards at Société Générale advises clients to prepare for a
violent policy swing from one extreme to the other. First we deflate into
the abyss: then we inflate hard rates to get out again. At some point the "euthanasia
of the rentier" will wear off. Misjudge the sequence at your peril.