It seems that Trump's victory, coinciding in time with the start of rate hikes by the US Federal Reserve, has - at last - given the starting signal for the bursting of the debt bubble we have experienced over the last decade - and this is paradoxical, given that Trump has always been the king of debt with his real estate and business empire - However, this bursting is only visible where the economy seems to be emerging from the hole of deflation and anaemic growth, namely in the US.What happens is that when the Treasury sneezes, long-term debt in Europe and Japan gets pneumonia. And that, the unwary fixed income investors of the last few years should have been well aware of.
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So we are already seeing how portfolios of pure fixed income (bonds) that had been promised so happily with the infinite debt rally served up on a plate by the central banks, are beginning to incur losses that surprise their long-suffering and poorly advised owners. The losses they are going to suffer are and will be directly proportional to the greed for yield they have sought, since the vast majority of advisors have preferred to increase maturities rather than reduce the rating of issuers. In other words, in order to obtain a meagre 2% yield, they have preferred to buy long-term bonds from issuers with investment grade ratings rather than to look at shorter-term issuers that are more solvent but less well regarded by the rating agencies (yes, they have been able to buy bonds with a higher rating than those with a lower rating), those same prostitutes who, obeying the voices of their political-financial masters, led us to collapse in 2007).
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The consequence of buying debt durations at such an exorbitant price, now that the bubble is starting to lose air, is none other than the devaluation in the price of that debt. This buying frenzy has reached such an extreme that the holder of Belgian government bonds with a maturity of 100 years (yes, yes, a century) is today losing a whopping -30%! And this with a black-leg (AA) rating and only a sneeze from the US Treasury Bond, as the US 10-year bond is still only at 2.5% interest, and therefore still has a long way to go before it normalises at levels of 4-5%. A death trap if ever there was one, where the poor deceived investor will not live long enough to recover this blow to his wealth. It should also be remembered that we are talking about fixed income (sic), i.e. investments that are invested in this type of asset because their owners do not want/cannot/should not suffer huge losses without putting their physical and mental well-being at risk. Moreover, this death trap has become gigantic in the last 10 years, since it has doubled to 45 trillion (45 Tr) dollars! You can read this article of Gurusblog in which they talk about this disaster announced by few.
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No one can say that we have not been warning about fixed income risk in recent years. Warnings to which many other advisors in the sector are now beginning to add their voices. SocGen: «The decade-long party in the debt markets is over (...) Prepare for a serious hangover». S&P: «Trump's unanticipated rise has let some of the air out of the bond market bubble». Bank of America Merrill Lynch: «It's a «stampede» out of bond funds», etc, etc... Needless to say that the fall in bond prices will force many to sell their portfolios, exacerbating the falls, which are no longer bleeding thanks to Draghi and company continuing to maintain a demand that is as astronomical as it is unrealistic.
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Expectations of an economic revival in the US brought about by President-elect Donald Trump's idiosyncrasies are fuelling and accelerating economic growth and inflation expectations. For example wages have clearly rebounded in the US labour market. For all these reasons, the fall in debt prices around the world, dragged down by the price of the Treasury, seems to have only just begun. And the worrying thing about this new scenario is how far the seams of hyper-indebted countries with public deficits (i.e. with growing debt) such as Italy, Spain, Portugal, Greece... will hold up before winter arrives...
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Against this backdrop, the trillion-dollar question is where to find income when the bond market bursts its bubble? There are some, but certainly far from the traditional fixed income fund circuit, as they have to be sought through alternative strategies that neither commercial nor private banks usually have in their sales catalogues. And of course, no one should confuse dividend stocks with fixed income, as let us not forget that stocks listed in developed markets are not cheap enough to take on such risk.
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But let no one get depressed, for it would be a far worse scenario for everyone if the debt bubble burst were to be aborted. For that would signal the failure of the economic recovery and the now desperate pumping of central banks to postpone an inevitable collapse. In other words, we should pray that the debt bubble bursts to reasonable levels even if it brings significant losses to poor, ill-advised savers/investors.
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Oh, by the way, Merry Christmas!
