A step closer to normalisation


Big Picture: Tipping Point?
Argentina: Risk is Risk
United States: When good news is bad news?
United States: Corporate Earnings exceed forecasts
Eurozone: First net easing in credit standards to corporates since 2007

Good morning,

Sometimes we arrive at an inflection point when previous concerns appear to be misguided and not particularly important. After years of debt worries and deleveraging, which held back the US economy, we are now at a new point where the economy has shrugged off these impediments and is now moving forward rapidly.

Yesterday’s 4% growth figure for the second quarter was a critical moment. From here, short-term rates will go higher but maybe not by as much as you would expect because I sense a tolerance of much higher inflation on the part of the Fed. This will cause the curve to steepen quite rapidly. At the moment, we are seeing movement in the short-end, but I suspect that will be reversed in time and the long end will ratchet upwards.

The reason higher inflation will be tolerated is that the debts haven’t gone away and in order to clean up the debtors’ balance sheets, creditors will have to accept that the golden age for lenders 1981-2014 is over. From here, more inflation, not less, is needed and so too is more growth for debts to be made sustainable – otherwise we get into an Argentinean type situation.

Deep in the Pampas, the government’s decision to give the two fingers to the hold-outs – those vulture funds trying to extort money out of Argentina – is going down well. I must admit, I have sympathy for the Argentine position on this one. The likes of Elliot & Associates – an outfit I once worked alongside – take large bets on risky assets. They get paid for this risk. But don’t tell me you are in the business of taking risky bets and then when those bets turn out to be risky, you go to court to have the risk eliminated!

That’s not how the game is played. If you seek big returns, you take commensurate risks and if the risk is default and the default occurs, well what do you expect?

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Global Macro-Daily Note 31st July 2014


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