The second signal comes from the desk of perma bear Albert Edwards of Societe Generale, who put out a note last week asking the question: “Has the bull market in government bonds finally ended?”
Pointing out that this bull market has been a key tenet of the firm’s Ice Age thesis for the past 20 years the fact that he is considering it now bears mention.
According to Edwards,: “The reason why bond investors are so worried this time is that they sense a decisive change in the mix of policy in the air. Central banks and the IMF have long been calling for governments to take on the baton of stimulus as they feel they had reached the limits of what monetary policy can do.”
Pointing out that, while the Japanese were the first to embrace the change to the mix of policy a few weeks back, the market has yet to fully understand the import of the BoJ’s decision to pin 10y yields to 0%.
“Pinning yields at zero basically gives the Japanese government a fiscal blank cheque to spend and borrow as much as it likes and if QE needs to be Y70tr or Y170tr pa to keep yields at zero, so be it… But most investors wrongly see Japan as offering little relevance to western markets. It was only the UK’s new Prime Minister, Theresa May’s blunt rejection of further QE as benefiting the rich and her promise to allow fiscal policy take the strain a total repudiation of the previous Tory Governments’ approach – that caused investors to sit up and smell the coffee.”
According to Edwards: “Japan is the template going forward as all pretence at fiscal and monetary policy rectitude will soon be thrown out of the window.