The end of one year and the beginning of another is always the time to reflect and look forward. 2016 was a tale of two separate years. The first half (which followed the Fed’s rate hike) saw unsettled markets. Equities around the world looked like they were unravelling in Jan. and early February. Sovereign credit markets were generally firm while gold and silver took off like scalded dogs.
Then in the middle of the year, equities rebounded, interest rates started to rise while the gold and silver rallies were contained. Interestingly, the mining shares which were at one point in May, up 150% ytd, are still up roughly 50% but have been crushed anew. The second half and in particular the last quarter has seen interest rates all over the globe begin to rise fiercely. I believe this is THE most important event of 2016, the end of a 35 year bull market in ‘credit’!
As we end the year, there is nearly no ‘RISK premium’ anywhere to be found. In fact, the mainstream explanation for higher rates is the ‘reflation’ trade, I disagree. I believe the higher interest rates are a function of liquidity tightness. The old debt/growth leading to more debt/more growth circle has been broken because ‘debt saturation’ levels have been reached. The central banks are stuck as they have cornered too much collateral and are now being forced to look at other markets (including equities) to onload to their balance sheets. Risk premium serves a very important purpose in ‘pricing’ assets. Central banks have tried to negate this concept and have only created a scenario of ‘premium’ nowhere and ‘risk’ everywhere. In a world with more debt and the worst debt ratios ever, risk is unaccounted for.
This post was published at JSMineSet on December 28th, 2016.
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