States create useful money, but abuse it

To the extent modern monetary theory is true, it is unoriginal; to the extent it is original, it is false

Martin Wolf




The state is the most important of all our institutional innovations. It is the ultimate guarantor of security. But its power also makes it frightening. For this reason, people sometimes pretend it is weaker than it is. In one area of economics, this is particularly true: money. Money is a creature of the state. Modern monetary theory, a controversial account of this truth, is analytically correct, so far as it goes. But where it does not go is crucial: money is a powerful tool, but it can be abused.

L Randall Wray of the University of Missouri-Kansas City set out these ideas in Modern Monetary Theory. They have the following fundamental elements.

First, taxes drive money. This doctrine is called “chartalism”. Governments can force their citizens to use the money it issues, because that is how people pay their taxes. The state’s money will thus become the money used for domestic transactions. Banks depend upon the government’s bank — the central bank — as lender of last resort. The IOUs of banks — the predominant form of money in today’s economies — are imperfect substitutes for such sovereign money. They are imperfect, because banks may become illiquid or insolvent and so may default. That is why banking crises are common.



Second, contrary to conventional wisdom, no mechanical relationship exists between holdings of central bank liabilities by banks (that is, reserves) and creation of bank money. Since the financial crisis, central bank balance sheets and bank reserves have grown hugely, but broader monetary aggregates have not. The explanation is that the dominant driver of the money supply is the (risk-adjusted) profitability of lending, which is high in booms and low in busts. The weakness of credit also explains why inflation has remained low.

Third, governments need never default on loans in their own currency. The government does not need to raise taxes or borrow to pay its way; it is possible for it to create the money it needs. This makes it simple for governments to run deficits, in order to ensure full employment.

Fourth, only inflation sets limits on a government’s ability to spend. But, if inflation emerges, the government has to tighten demand, by raising taxes.

Finally, governments do not need to issue bonds in order to fund themselves. The reason for borrowing is to manage demand, by altering interest rates, or the supply of reserves to banks.

This analysis is correct, up to a point. It also has implications for policy. A sovereign government can always spend in order to support demand. Again, expansion of the central bank balance sheet does not make high inflation likely, let alone inevitable. Some believers in MMT argue that the power to create money should be used to offer a universal jobs guarantee or finance programmes such as the Green New Deal proposed by Democrats in the US. But such ideas do not follow from their analysis. These are just suggestions for where the state should spend.



What then are the problems with MMT? These are twofold: economic and political. An important economic difficulty, clear from painful western experience in the 1970s, is that it is hard to know where “full employment” lies. Excess demand may exist in some sectors or regions, and deficient demand elsewhere. Full employment is a highly uncertain range, not a single point.

A still more important economic mistake is to ignore the expectations that drive people’s behaviour. Suppose holders of money fear that the government is prepared to spend on its high priority items, regardless of how overheated the economy might become. Suppose holders of money fear that the central bank has also become entirely subject to the government’s whims (which has happened often enough in the past). They are then likely to dump money in favour of some other asset, causing a collapsing currency, soaring asset prices and booming demand for durables. This may not lead to outright hyperinflation. But it might lead to a burst of high inflation, which becomes entrenched. The focus of MMT’s proponents on balance sheets and indifference to expectations that drive behaviour are huge errors.

These mistakes are economic ones, but there is a related and far worse political error, as Sebastian Edwards of University of California, Los Angeles, has argued. If politicians think they do not need to worry about the possibility of default, only about inflation, their tendency may be to assume output can be driven far higher, and unemployment far lower, than is possible without triggering an upsurge in inflation. That happened to many western countries in the 1970s. It has happened more often to developing countries, especially in Latin America.

But the economic and social consequences of big spikes in inflation can be very damaging.



Yet the same is also true for high unemployment. So, in managing a modern monetary economy, one has to avoid two gross errors. One is to rely on private sector demand too much, since that can all too easily end up with highly destructive financial booms and busts. The opposite error is to rely on government-led demand too much, since that may well generate destructive inflation booms and busts.

The solution, nearly all of the time, is to delegate the needed discretion to independent central banks and financial regulators. Yet proponents of MMT are right that during a period of structurally feeble private demand (as in Japan since 1990) or a deep slump, a sovereign government must and can act, on its own or in co-operation with the central bank, to offset private weakness. There is then no reason to fear the constraints. It should just go for it.

Investors should be wary as private equity firms switch structures

It is only a matter of time before one of the big investment groups runs into trouble

Sebastien Canderle


In April, Blackstone announced it was converting to a corporation, ditching a partnership status that has shielded much of its income from corporate taxation © Bloomberg


Since Blackstone’s 2007 initial public offering, US alternative fund managers have scrambled to join the stock market, with the idea of giving their founders a way out — a notoriously challenging process in private partnerships.

As at accountancy and law firms, partners at investment firms are only offered the option to sell when they leave the organisation. Fellow partners are the main escape route — they buy the shares, preventing retiring partners from participating in any future upside.

Until recently, most private equity groups have retained a partnership structure to avoid the 35 per cent tax rate on US corporations. But now that US president Donald Trump’s 2018 tax changes have cut the corporate rate to 21 per cent, the advantages of a partnership are less clear. That has made a C-corporation structure a lot more palatable.

Ares and KKR were the first fund managers to take the conversion plunge last year. In April, Blackstone followed suit and in early May, Apollo Global Management made the same call. Blackstone’s Stephen Schwarzman said: “The decision to convert . . . should drive greater value for all of our shareholders over time.”

The advantages of switching seem obvious for founding partners, who are way past retirement age and need to buoy liquidity to ease future share disposals. Should public investors believe the argument that the new structure will also lead them to riches?

If history is any guide we can predict that it is only a matter of time before one of the big investment groups runs into trouble. There is a precedent: the Wall Street banks that morphed into corporations with hapless results.

Like today’s private capital firms, Salomon Brothers, Bear Stearns, Drexel Burnham Lambert, Lehman Brothers and Merrill Lynch were set up as partnerships and were avid dealmakers. They incorporated and experienced brisk, unrestrained growth in the 1980s thanks to deregulation. But it didn’t take long for things to turn sour.

In 1986 Drexel faced scandal when a managing director was charged with insider trading. Two years later, bond trader Michael Milken was accused of self-dealing and bribery. The bank settled criminal and civil charges, but by 1990 it had gone bust.

Within a decade of its own conversion, Salomon stood accused of market rigging when, in 1990, trader Paul Mozer submitted false bids in an attempt to purchase more Treasury bonds than permitted. Weakened by the criminal proceedings, the firm was acquired by insurance group Travelers. As for Bear Stearns, Lehman and Merrill, the extent to which their behaviour during the subprime mortgage bubble contributed to the end of their independence is well known.

Historically, partnerships led to more prudent decisions because partners were jointly and severally liable. To make it less risky to establish businesses, the concept of limited liability partnerships was introduced, providing separation between outside investors and liable executives running the business. The PE groups use the LLP model.

Even so, managers in a partnership are rewarded in illiquid shares that yield wealth only if the business creates value over time. Senior officers must consider the firm’s reputation and survival as paramount. By contrast, executives in a public corporation receive annual bonuses and share options that are exercisable and tradable within a few years.

Since the financial crisis, bankers’ pay has been under tighter supervision. Many deal junkies have migrated to private capital, receiving instant gratification through management fees that mount up, irrespective of performance.

As PE founders who set up shop decades ago prepare to exit by converting to corporations, prospective investors should stay vigilant. A corporate status can amplify unprincipled behaviour.


The writer is a lecturer in private equity at Imperial College


Thoughts For A Pivotal Weekend

by: The Heisenberg

Summary
 
- As a blockbuster first half comes to a close for markets, all eyes turn to the G20, where presidents Trump and Xi will try to find common ground.

- Three things have to happen (or not happen) for multi-asset investors to enjoy another outstanding six months.

- As for the trade talks, the Huawei issue is the key.

- Herein also find some uncomfortable math for a prospective next round of China tariffs and a margin reality check for protectionist proponents.

 
As markets warily eye Saturday's all-important meeting between Donald Trump and Xi Jinping at the G20, I wanted to make a couple of quick points for readers headed into what, by all accounts, should be a pivotal weekend. As usual, this is designed to be a concise treatment, with an eye towards brevity and should be taken as such.
 
On Friday, former trade-turned Bloomberg columnist Richard Breslow wrote that "if you had to force an opinion it would be cautious optimism tempered by the notion that such an attitude remains very much a work-in-progress."
 
That assessment applied both to the market outlook for the second half of the year, and to prospects for something amicable to come out of the G20 in Osaka. "Things could turn out with a positive, risk-on cast but there are significant hurdles, fundamental and technical, to overcome," Breslow went on to write.
 
When it comes to markets, let me just pick up where I left off in a Thursday post for this platform. It's difficult to imagine that the second half of 2019 could be kinder to multi-asset investors than the first half. H1 was the best first half to a year for the S&P since 1997. At the same time, the iShares Core U.S. Aggregate Bond ETF (AGG) had what looks like its best half on record.
 
(Heisenberg)
 
In a true testament to just how over-the-top the bond rally was, the German 30-year bond logged a total return of some 15%. That would be the second-best 6-month return in a quarter century and very nearly better than the S&P's first-half gain.
 
Recent gains in the IG credit ETF (LQD) are borderline comical.
 
(Heisenberg)
 
 
Those interested in a full breakdown of cross-asset performance during the first half of the year can find it here, but for our purposes, suffice to say 2019 has been the opposite of 2018. Last year, USD "cash" outperformed nearly everything on the planet. This year, nearly everything on the planet has performed well.
 
In order for this to be any semblance of sustainable, I would argue that a trio of conditions have to be met. First, trade tensions have to simmer just enough to keep the Fed on track to cut rates, but cannot boil over to the point where the US moves ahead with 25% tariffs on the remaining $300 billion in Chinese goods and absolutely cannot escalate to auto tariffs on Europe and Japan.
 
Second, the Fed has to largely deliver on market expectations which means, at the least, cutting rates in July and again in September and maintaining a dovish bias (i.e., "ready to act to sustain the expansion") throughout.
 
Third, the economic data in the US cannot decelerate so much that recession fears outweigh the prospect of Fed cuts in the minds of equity and credit investors. With stocks perched near record highs and the US corporate sector dangerously over-leveraged (by some measures), definitive signs that the cycle is turning too quickly could spark a rout in stocks and a dramatic widening in spreads if the Fed isn't seen as adequately responsive. It's worth noting that Friday brought the first contractionary PMI reading in the US, as the MNI Chicago business barometer printed just 49.7 for June, missing consensus expectations by four handles.

On the G20, early reports indicated that Beijing was prepared to demand, as a precondition for resolving the trade dispute, that the Trump administration lift the ban on Huawei. Although Larry Kudlow subsequently called reports of preconditions on either side "fake news," everyone knows the Huawei ban was the last straw for China. The placing of the country's corporate crown jewel on the Commerce department's entity list made it clear that the US is after far more than reducing bilateral trade deficits. The Trump administration is aiming to curtail China's global tech ambitions, something that was underscored powerfully late last week when Wilbur Ross added four firms tied to the country's super-computing industry to the same blacklist, prompting alarm from the likes of SocGen, whose analysts wrote the following:
The addition of these five firms to the Entity List, coming right after Huawei… suggests that even intellectual property rights and spying concerns related to 5G deployment could be secondary issues. In fact, the prospect of China building a competitive semiconductor industry may well be the key worry.
The problem with lifting this ban in the interest of resolving the trade war is that the US is engaged in a global push to bring America's allies around to the idea that Huawei is a national security threat.
 
The administration has worked night and day (figuratively and, one imagines, literally) to make the case to other countries. Were Trump to simply lift the ban, it would raise questions about how serious the White House actually took the national security narrative in the first place. Meanwhile, Micron (NASDAQ:MU) made all manner of headlines earlier this week when the company said it had begun shipping some products to Huawei again (I wrote a detailed account of that here). That reportedly irritated some hardliners within the administration, which is likely to mean that opposition to a wholesale lifting of the ban has calcified.
 
If the Huawei ban isn't lifted, it seems unlikely that Beijing will be willing to work towards a deal. It wasn't clear from early reports whether Xi was willing to restart talks without a lifting of the ban, but even if he is, Huawei will cast a pall over the discussions and potentially deep-six the chances of a resolution.
The next round of tariffs (assuming there is one) will hurt. Although it seems likely that Trump would start with a 10% levy on the remainder of Chinese goods before going "all-in" with 25% duties, import substitution will become increasingly challenging. Here, in brief, is the problem, as quantified by Goldman:
Goods in which China supplies a large share of total US imports are less likely to provide scope for import diversion if sufficiently developed production chains are not yet in place in other countries. To test this, for each category we construct a measure of import diversion as the change in nominal ex-China import growth relative to the nominal value of imports of the category from China, which roughly captures the share of US imports from China replaced by increases in imports from other countries. We find a sizable and statistically significant negative relationship between our measure of diversion and the share of US imports from China (Exhibit 3, top). Many of the imports from China not yet hit by tariffs have large China import shares, and our analysis therefore suggests significantly less scope for substitution of imports going forward (Exhibit 3, bottom). 
 
It doesn't help that, during an interview with Fox earlier this week, President Trump suggested he might put tariffs on Vietnam, whose exports to the US exploded in Q1 thanks in large part to substitution effect from the China tariffs. Obviously, if you start slapping punitive tariffs on countries you rely on for trade diversion, you effectively remove one of the pressure valves that mitigated what would otherwise be the deleterious effect on American companies that source from abroad.
 
In an age of ascendant populism, there's no shortage of criticism when it comes to the purported ills of globalization. If you can manage to put your political leanings aside for a moment and look at things purely from the perspective of your portfolio, you might be interested to note that over the last 15 years, globalization has been the largest contributor to margin expansion for S&P 500 companies.
(BofA)
 
 
If the protectionist push continues, don't be surprised if you start to notice the bottom line deteriorating for any companies in your portfolio without sufficient pricing power to offset margin compression.
 
As far as the base case for the Trump-Xi pow wow, the most likely outcome is another handshake deal like what the market got in December. Further tariffs and non-tariff escalations would be postponed in that scenario as the two sides restart stalled talks.
 
For whatever this is worth (which is actually something, given that it isn't wholly subjective), BofA was out with the following take on Friday as part of a much longer G20 preview:
Base case (truce – no comprehensive deal, but no new tariffs). Buy high quality Industrials. Industrials are pricing in an earnings recession already. We continue to see higher volatility under a truce and prefer high quality stocks. Defense stocks could benefit from potential for heightened geopolitical tensions. Software over Semis. 74% of Semis’ revenue growth since 2010 has come from Asia Pacific. Within Tech we would prefer Software, which has less China exposure.
 
 
To be clear, there is no chance of a "real" trade deal over the weekend, where that means all of the issues are resolved and a date is set for a signing ceremony.
 
There is, however, a small chance that Trump and Xi do not agree to anything other than to stay in contact (i.e., no announcement that principal-level talks will ramp back up). If that happens and the news is accompanied by some kind of irritated tweet, don't expect risk assets to be in a good mood come the Sunday FX open.

How to contain Iran

As America and Iran inch closer to war, new talks are needed

Negotiation, not confrontation, is the way to stop the mullahs from getting the bomb




FOR NEARLY four years Iran’s path to a nuclear weapon was blocked. The deal it signed with America and other powers in 2015 limited its nuclear programme to civilian uses, such as power-generation, and subjected them to the toughest inspection regime in history. The experts agreed that Iran was complying and that its nuclear activities were contained.

But then President Donald Trump ditched the nuclear deal and Iran resumed stockpiling low-enriched uranium. It is now poised to breach the 300kg cap set by the agreement. Iran may hesitate before crossing that line, but it is also threatening to increase the enrichment level of its uranium, bringing it closer to the stuff that goes into a bomb.

Fortunately, Iran is not about to become a nuclear-weapons power. Its breakout time is over a year. But it is once again using its nuclear programme to heap pressure on America. That adds an explosive new element to an already-volatile mix. America accuses Iran of attacking six ships in the Strait of Hormuz since May.

On June 20th Iran shot down an American spy drone. America insisted the aircraft was above international waters, not Iran’s, and sent warplanes to strike back. Ten minutes before they were due to hit targets inside Iran Mr Trump called them off and contented himself with a cyber-attack instead.

Neither Mr Trump, nor America’s allies, nor Iran wants a big new war in the Middle East. Yet Mr Trump’s strategy of applying “maximum pressure” on Iran is making the prospect more likely—because each side, issuing ever-wilder threats, could end up misreading the other’s red lines. The president’s room for manoeuvre is shrinking.

As Iran turns more belligerent, calls for action will grow, not least from his own party. Before things escalate out of control, both sides need to begin talking. That is not as unlikely as it sounds.

Mr Trump’s Iran strategy is based on the premise that Barack Obama gave too much away too easily when he negotiated the deal in 2015. Last year the president set out to get better terms by reneging on the agreement and reimposing the sanctions that have crippled Iran’s economy.

This, his advisers argue, will force a weakened Iran to accept a new deal that lasts longer than the old one, most of which expires by 2030. They also want curbs on Iran’s missile programme and an end to its violent meddling in the region. Mike Pompeo, the secretary of state, sees recent Iranian aggression as a sign that the strategy is working.

Hard-hitting sanctions brought Iran to the negotiating table in 2015, but they are unlikely to lead to the transformation Mr Trump wants. One reason is that he has discredited Hassan Rouhani, Iran’s president and a champion of the nuclear deal. Hardliners are now calling the shots. Another is that America is acting alone. In 2015, in a rare moment of international unity, it had the support of its European allies as well as Russia and China.

Maximum pressure comes with extra risks, to boot. The mullahs and their Islamic Revolutionary Guard Corps want to prove their mettle by showing that Mr Trump’s actions have costs—for everyone. On top of the attacks on ships and drones, Iranian proxies have hit pipelines in Saudi Arabia and are suspected of having struck Iraqi bases hosting American troops. If sanctions are not lifted, Iranian officials may resort to closing the Strait of Hormuz, through which one-fifth of the world’s oil passes.

Hawks like John Bolton, Mr Trump’s national security adviser, retort that if Iran wants war, that is what it will get—especially if it shows signs of dashing for a nuclear bomb, which could trigger disastrous proliferation in the Middle East. But this is the riskiest calculation of all. Having pulled out of a working deal, America may not win the backing of European allies for strikes. China and Russia would vehemently oppose any action at all.

Perhaps sanctions or war will cause the regime to crumble. But that is hardly a strategy: Cuba has resisted sanctions for decades. More probably, a defeated Iran would heed the lesson of nuclear-armed North Korea and redouble its efforts to get a bomb. Attacking Iran’s nuclear facilities would not destroy its know-how, as even Mr Bolton admits. If, as is likely, Iran barred international inspectors, its programme would move underground, literally and figuratively, making it very hard to stop.

The alternative to today’s course is talks between America and Iran. Just now that looks far-fetched. Iran’s foreign ministry says American sanctions imposed on Ayatollah Ali Khamenei, the supreme leader, and other top officials this week mark “the permanent closure of the path of diplomacy”. Mr Rouhani has suggested that the White House is “mentally handicapped”—after which Mr Trump threatened “obliteration”.

But optimists will remember similar clashes between America’s president and Kim Jong Un, North Korea’s despot, before they met in Singapore and “fell in love”, as Mr Trump put it.

When he is not threatening to annihilate the mullahs, Mr Trump is offering to talk without preconditions and to “make Iran great again”. He does not want the prospect of war in the Middle East looming over his re-election campaign. Likewise, in Iran the economy is shrinking, prices are rising and people are becoming fed up. Pressure is growing on Mr Khamenei to justify his intransigence. Love could yet bloom.

America might coax Iran back to the table with a gesture of good faith, such as reinstating waivers that let some countries buy Iranian oil. Iran, in turn, could promise to comply with the nuclear deal again. Behind the scenes, its leaders have expressed a willingness to sign something like the old agreement with additions—such as extending parts of the deal beyond 2030.

Negotiations would never be easy; the Iranians are infuriating to deal with. But that would let the president claim victory, as he did with the United States-Mexico-Canada Agreement, which his administration signed last year and which looks a lot like its predecessor, the North American Free Trade Agreement.

What of a deal that also curbs Iran’s missile programme and restrains it in the region? As Mr Trump seems to realise, biting everything off in one go is unrealistic. A new deal cannot solve all the problems posed by Iran or normalise ties with America after decades of enmity. It may not even lift all America’s sanctions. Neither did the first agreement. But, if done right, a deal would put Iran’s nuclear programme back in a box, making it easier to tackle all those other problems without causing a war.

Why gold still shines for some despite a difficult decade

What remains a popular investment for many clients is seen as too unpredictable for others

Tom Stabile


Gold fingers: The precious metal’s price hit a five-year high recently, but is still down since 2011 © Bloomberg


Gold’s unique place in portfolios faces a series of tests. Its tepid performance since its 2011 peak, an uncertain global economic outlook, the rise of cryptocurrencies and a drive towards sustainable investing have all put off US investment advisers from turning to the metal — even as their clients have ever more ways to invest.

While gold tends to be a small holding for a limited number of clients, advisers say, it stands apart from other commodities because of complicated supply and demand trends that emerge from its many portfolio roles: as a safe haven asset, a consumable product, a de facto currency and a deposit of value.

Gold is a unique commodity, says Brent Armstrong, partner at Weatherly Asset Management, an $833m independent advisory firm in California that caters to clients with $2m to $25m in assets.

“We can look at its use in jewellery and electronic products, but it’s also been a human emotional store of value for thousands of years. That often clouds the lines, and creates movements and exuberance around the asset class.”

Gold today trades around $1,300 per ounce, some way down from the 2011 peak of $1,900, which followed the financial crisis.

Juan Carlos Artigas, director of investment research at the World Gold Council, says that although gold makes up less than 1 per cent of all global assets — estimated at $317tn by Credit Suisse last year — it remains an active market.

Gold demand was up 7 per cent year-on-year to 1,053 tonnes in the first quarter this year, according to World Gold Council data, thanks in part to a spike in purchases by central banks and exchange traded funds tracking the asset class.

Investors own gold for a variety of reasons, such as diversification, liquidity and hedging. They gain exposure to it largely through bars, coins, ETFs, futures and mining company stocks.

Many choose physical gold for a longer-term asset, while ETFs that own gold reserves or futures contracts — a $100bn market — offer a more liquid exposure, meaning investors can sell quickly if necessary.

Many factors help set gold’s value, from consumer demand to movements in interest rates, the US dollar, and global GDP. For example, the price of gold suffers from higher interest rates, as investors sell it to buy interest-generating assets.

This year, Mr Artigas says investors should look out for the impact on gold of capital markets volatility, the path of US Federal Reserve policy and the pace of global structural economic reforms.

But some clients seek gold investments no matter the trends, says Laurie Kamhi. She is managing director at New York-based LCK Wealth Management, part of the $48bn HighTower Advisors platform, which serves entrepreneurs and executives. “You’d be surprised at how many of them invest in bars as a way to store money,” Ms Kamhi says.

Gold’s role in portfolios can be limited, as is the case for Chicago-based RMB Capital, a $9.4bn independent adviser and asset manager. “We see it as a more tactical opportunistic investment for when the right macro factors are in play,” says RMB vice-president Ryan Kennedy. “It’s not a permanent part of client portfolios.”

One current opportunity for gold and other commodities to come into favour is if the dollar weakens, Mr Armstrong says. “While the dollar is strong, there’s a chance for it to reverse in the near and medium term,” he says.

RMB Capital tends to invest in gold through ETFs. In the past this was done using a dedicated strategy, but more recently RMB has used a diversified commodity allocation that invests in futures contracts, Mr Kennedy says.

LCK Wealth also has moved from gold ETFs in recent years to seeking gold exposure in blended commodities funds.

A concern for advisers in the longer term is the underwhelming performance of the asset class so far this decade. “There have been number of different market events that could have allowed gold to advance, but didn’t,” says Mr Armstrong.

Another challenge is a trend among some investors to use cryptocurrencies such as bitcoin as a rival savings medium, according to Ms Kamhi. “There is a lot of interest in whether the crypto market over the very long term will replace the need for gold,” she says.

Indeed, many investors who in the past considered gold a safe haven when the dollar falls may instead look to the yen or government bonds, Mr Armstrong says.

“It remains to be seen if gold could get pushed to the back burner, or if the emotional connection holds true,” he adds.

The rise of sustainable investing could pose yet another set of obstacles for ownership of the metal, Ms Kamhi predicts.

Gold mining in particular raises the potential for environmental exploitation and fair labour and compensation problems, she says.

“That’s a long-term trend, not for tomorrow morning,” she says. “But there may be a different view of its desirability. It’s not going to be a big holding in the sustainable funds.”


Chubby cats

Goldman wants to manage the assets of the middling rich

The bank bought United Capital, a boutique wealth-manager, for $750m




IF THE BEST way to get rich is by managing other people’s money, it helps if your clients control a lot of it. For private-equity firms and hedge funds, that means courting pension-fund managers, investment bankers and the like. For the top wealth managers, the money in question belongs to the super-rich, whom they advise on asset allocation, tax planning and even which artists should adorn their walls.

Now some are starting to tout for the custom of the merely well-heeled. On May 16th Goldman Sachs paid $750m in cash for United Capital Financial Advisors, a wealth-management firm based in California that manages $25bn-worth of assets for 22,000 clients. It was Goldman’s biggest acquisition in two decades.

It accelerates the firm’s shift of emphasis under David Solomon, who became its boss last year, away from volatile businesses such as trading towards more stable fee-based ones. It also broadens Goldman’s target market for wealth-management services. Until now, the bank’s individual customers were drawn almost entirely from the ranks of those with at least $25m in investable assets. United Capital serves those who have $1m-5m.

The non-filthy rich used to find it surprisingly hard to get customised help with managing their money. The fees they generated were not fat enough to satisfy full-service wealth advisers at the biggest investment banks. But the mass-market offerings of brokers and retail banks were not sufficient. Into this gap came firms like United Capital, founded in 2005 by Joe Duran, its chief executive (who will join Goldman as a partner). The firm’s platform enables its advisers to manage relationships more efficiently. The client’s age, career status and so on are used to build up a financial profile, and advisers can send video updates about major market moves to those whose portfolios are affected.

The acquisition fits well with Goldman’s evolving thinking about wealth management. In 2003 it acquired Ayco, which specialised in managing the assets of top-ranking company executives. Ayco has since expanded into offering financial-planning services to everyone at the companies it serves, says Larry Restieri, the Goldman partner who runs Ayco. Moreover, uninvested deposits with United Capital can conveniently be funnelled to Goldman’s consumer bank, Marcus.

Competition to serve the mass affluent is heating up. In February Morgan Stanley, which is around the same size as Goldman but makes twice as large a share (40%) of its revenues from wealth management, announced that it would buy Solium for $850m. The software company, since rebranded Shareworks by Morgan Stanley, provides a platform for companies to administer shares and stock options paid as part of compensation. The acquisition is appealing in two ways, says Jonathan Pruzan, Morgan Stanley’s chief financial officer. It brings an opportunity to acquire younger customers who may one day be very rich, and it allows the bank to use Shareworks to offer those employees access to Morgan Stanley’s own products.

The mass-affluent market is becoming better served in other ways, too. Online financial advisers such as Betterment, which manages $16.4bn in assets, are developing clever new ways to counsel customers on what to do with their savings. Investment banks, it seems, are not alone in deciding that the best way to get rich is not to manage rich people’s money, but to manage everyone’s.

The New Math of Saving for Retirement May Boil Down to 1 Absurdly Simple Rule

By Joshua Gotbaum, MarketWatch


abacus Photograph by Crissy Jarvis

 

“Eventually, I’ll stop working.” Most of us think that and know it will happen, but millions of us worry whether we’re saving enough to live on once we do. We want to know: How much of my earnings should I set aside? What’s the magic number? 3%? 5%? 10%? More?

What your financial adviser won’t tell you:

Unfortunately, the retirement industry has spent decades largely avoiding the magic-number question. “There’s no magic number for everyone,” some say. “It’s complicated,” say others. And then they offer, sometimes for a fee and sometimes for “free,” to take our money and invest it for us — often without telling us whether it’ll be enough when the time comes.

Why will no one give us a magic number? They don’t want to be legally responsible when the number turns out to be too low, which, for some of us — especially those whose pay is low or whose investments are poor or who live long and need a nursing home for years — it will. The legal jitters are understandable, but they leave us in the dark about how much to save.

Don’t give up hope. There’s research that can help — from institutions that don’t have a conflict of interest because they don’t invest or give advice. My favorite is the Employee Benefits Research Institute in Washington, D.C. EBRI, as it’s called, gathered anonymous information on tens of millions of people and how they actually save. It won’t tell people what to do, but from its research there’s a pretty useful rule of thumb: Count on your fingers and...

Save 10% — now

Between you and your employer, set aside at least 10% of your paycheck. If your employer contributes 3%, then your share is at least 7%. If the company kicks in 5%, then you save at least 5%. If your employer does nothing, set aside at least 10% of each paycheck on your own.

Of course, there will be times when you’re between jobs or you need your money for a pre-retirement-age emergency. In those cases, you can put your money in a Roth individual retirement account (IRA) account. That way, you can take your contributions out without penalty. (There are also Roth 401(k) accounts, though they have more complicated withdrawal rules.) Don’t let the fact that you might need money someday keep you from saving for retirement now.

It’s perfectly OK to consult a financial adviser and get more personalized recommendations, but if you can’t or don’t want to — or while you’re waiting to “get around to it” — set aside enough so that, together with your employer match, you’re putting aside at least 10%.

America’s No. 1 fear: golden years minus the gold

People are living longer. That’s both good news and bad: We hear about baby boomers moving into posh “active adult” communities, but we also hear about disabled and bedridden elderly requiring years’ worth of health aides and the constant help of their children. Either way, longer lives seem expensive.

And our capacity to lay the groundwork for retirement can feel pinched from all directions. Life can be expensive even in our earning years, with college tuition, housing and medical costs in the stratosphere. Student loans and credit-card debt intrude. Social Security, we’re told, is at risk. Lifetime pensions are, for most, a thing of the mythical past. All that most of us feel we can count on is a retirement account that’s at the mercy of the markets and, we suspect, doesn’t have enough in it. Many, of course, don’t even have that.

Experts often tell us how complicated this is to figure out — and why we should hire them to do it for us. And it is easy to make it complicated: We can try to decide — now, decades before we’re ready to even think about retiring — what our future earnings will be and how long we’ll work, what lifestyle we’d prefer in retirement, how much health care will cost decades down the road, how long we’ll live after retirement (with a margin for error, of course), how our money should be invested and what our investment returns will be (with, again, a margin for error). Not complicated enough? Add whether or not we’ll need funds at hand to support children or parents or other family members.

The result is confusion. Some people get financial advice. Others turn to online retirement calculators. Many, sadly, do nothing at all, falling back on a vow of resignation: “I’ll just keep working.” (Spoiler: Almost no one who says they’ll work until they die ends up doing so.) For still others, it means saving too little.

Modeling for millennials

How can EBRI’s model help? It estimates the risk of running out of money after retirement by taking into account many more factors than the usual online calculator: contributions, market changes, Social Security benefits and salary growth, as well as a range of health outcomes and longevity prospects. It can then estimate the risk that — for particular savings rates and income levels — a person’s expenses in retirement will overwhelm their savings plus Social Security benefits.

For this article, EBRI provided projections for today’s 25-year-olds at multiple income levels; we’ll interpolate the results to reflect the median income of today’s 25-year-olds, which is $30,000.[1] (The projections assume that people will earn more as they get older.)

We then applied EBRI’s projections to three millennials. Their names have been changed, but they are all in their mid-20s. We’ll assume they’re average earners:

•Phillip, working in a startup, contributes 3% of pay to a retirement account. His employer contributes nothing.

•Ida, an office worker, contributes 3%, which her employer matches, for a total of 6%.

•John, working for a financial firm, contributes 8%. His employer contributes 4%, for a total of 12%.

Are they contributing enough, too much or too little? Here’s how, based on EBRI’s model, our millennials and their different savings practices would end up at retirement:

• If Phillip, from a current salary of $30,000, continues to contribute just 3%, he has a 56% chance of running through both his retirement savings and Social Security in his lifetime. (If he were earning $40,000 now, the odds improve, but his chance of running out of money still exceeds 40%.) Clearly, then, 3% isn’t enough.

Ida, being a woman, will likely live longer, so her 6% total contribution will have to last longer, and the probability that neither it nor Social Security will be enough is 47%. Sounds like 6% is too low, as well.

•John, contributing 12% of pay, has less than one chance in four (23%) of running out of money.

Overall, the EBRI simulation model suggests that, in the income ranges of most millennials, a contribution rate of 10% starting in a worker’s mid-20s cuts the risk of running out of money in retirement to about 30%, less than one chance in three. Contributing more than 10% when you can will give you a better cushion.

Of course, everyone’s situation is and will be different, so 10% is a guideline, not a guarantee. (Furthermore, if you start later in life, 10% won’t be nearly enough.)

Digital piggy Banks

By now you’re probably thinking, “This is easier said than done.” And you’re right. Saving for retirement is like dieting in that we’re better at making resolutions and excuses than making progress.

But technology makes the savings part easier, too. More and more employer plans will sign you up automatically. If your employer doesn’t have a plan, you can set up a Roth IRA with a bank or an investment company and have a portion of each paycheck deposited automatically. Some states, including Oregon, Illinois, California and Maryland (whose program I chair), are setting up IRA programs for small businesses that don’t offer retirement plans.

The good news is that, in one respect, retirement saving is easier than dieting: If you fall off the wagon, you can start again and feel better immediately.

Yes, life is complicated. Retirement plans don’t always turn out as planned. But if, while worrying about everything else, we each adhered to the 10% rule as much as we are able, there would be a lot less retirement insecurity and a lot more gold in the golden years.


Joshua Gotbaum is a guest scholar at The Brookings Institution focusing on retirement issues. He has worked in finance and government for over 40 years. These are his personal views. This article originally appeared on MarketWatch.

Today’s China will never be a superpower

It cannot afford it, and the single-party state will not allow the necessary reforms

Charles Parton


President Xi Jinping speaks at the National People's Congress in Beijing, March 2018 © Reuters


China wants to be a superpower, or even the global superpower, by the middle of this century. That is the meaning of Xi Jinping’s second “centennial goal”: becoming a “strong, democratic, civilised, harmonious and modern socialist country” by 2049, the 100th anniversary of the founding of the People’s Republic of China. It won’t be so.

Whether you use the original definition of superpower status — the possession of pre-eminent military power and the ability to project it globally — or whether you broaden it to include economic, political, cultural and intelligence power, and the ability to shape international governance, what matters is the long-term capacity to pay for it all.

The costs China bears today are small compared with those it would need to shoulder — for decades — as a superpower. Its military expenditure falls far short of America’s. Domestically, the costs of repression and stability are said to be even greater than the budget of the People’s Liberation Army. An ageing population of 1.4bn requires a comprehensive social security system. The costs of rectifying the environment are mind-boggling.

Assume no US growth until 2049 and China’s GDP would need to increase at nearly 6 per cent every year (few believe it has been that high of late) just to match America’s 2018 per capita income. Such smooth growth defies all empirical experience. It also assumes that the renminbi peg survives in perpetuity. George Magnus, in his excellent book Red Flags, lays out why the peg is crucial and why it will break within five years.

China had been driving up an economic cul-de-sac and needed to find a new road. Hence, in 2013 Xi Jinping launched his reform programme, declaring that the economic model of the time was “uncoordinated, unbalanced and unsustainable” — words used earlier by former premier Wen Jiabao and repeated in 2017 by politburo member Yang Jiechi. That year, a think-tank of China’s National Development and Reform Commission described reform progress as minimal. Today, the Rhodium Group’s excellent quarterly evaluations assess reform progress as rudimentary.

This is no surprise. There is a contradiction at the heart of reform, between the Leninist need to hold on to the levers of economic power (to avoid the rise of economic interests that might turn political and mutter “no taxation without representation”) and giving more play to the market.

Reform aside, there are three obstacles to China’s long-term economic growth. The first is the debt problem. At some stage, the costs of debt have to be borne, whether by people, companies or the government, and whether by inflating debt away, increasing taxation or cutting public investment and spending.

The second obstacle is demographics. While China’s population will continue to grow for perhaps a decade, its labour force is already shrinking — precipitously. China’s official birth rate of 1.6 children per woman is one of the world’s lowest, even as its population ages. The costs of social security, of caring for the elderly, will be enormous. Labour productivity must rise very quickly.

Another demographic fact is worrying in terms of instability: gender imbalance. The old one child policy reinforced cultural preferences, meaning that over the coming decades China will have between 30m and 40m men in the sexually active bracket of 20-40 years of age who will not find a partner. Their frustration may lead to unrest and instability.

The third problem, and perhaps the greatest, is a looming water crisis in 12 northern provinces that account for 41 per cent of China’s population, 38 per cent of its agriculture, 46 per cent of its industry and 50 per cent of its power generation. Neither water transfers nor desalination can prevent severe economic, social and political dislocation. What is required, if it is not already too late (and climate change looks likely to make the region drier), are massive changes in agriculture, industry and people’s lifestyles. A prime instrument would be the correct pricing of water. But raising the price by many times, as the head of one Beijing water company suggested (only to be told to pipe down), is politically impossible: the Chinese Communist party (CCP) fears that the resulting dislocation and inflation would cause unrest.

It is commonly said that if any government is capable of pushing through change, however unpopular, it is the CCP. If that were so, Mr Xi would not have expended so much energy in cajoling and excoriating officials for failure to implement his policies. The governance model is flawed: 1.4bn people cannot be governed using top down fiat and inspection, while eschewing self-regulation.

Yet Mr Xi has specifically turned his back on four useful allies: the rule of law and an independent judiciary, which is essential for business and private sector confidence; a free press, for example to help expose corruption or abuse of the environment; civil society, from where ideas, innovation and pressure flow; and some sort of political accountability, to encourage officials to work for the benefit of the people and not of themselves or the party.

All four of those allies weaken party controls and risk leading eventually to a pluralist system, undermining one party rule. So the CCP rejects them.

To the factors above can be added a lack of trust by the people in the CCP. Nationalism is an inadequate substitute. To give one example of this lack of trust, consider the internationalisation of the Chinese currency. A superpower must surely have a currency that is freely traded throughout the world. But what would happen if China opened its capital account? Because the people don’t trust the party, today’s capital flight would become a flood. Investors would abandon the current destination of their savings, the domestic housing market. Its collapse would precipitate a recession and unemployment. And the number one fear of the party is instability caused by unemployment. If you claim credit for all good things, you also earn discredit for the bad.

Could innovation come to the CCP’s rescue? A high-tech society with high productivity might help China grow out of debt, need fewer workers and cope with less water. Mr Xi himself in a January 2016 speech said that “Innovation is China’s Achilles heel”. He may be right.

The devotion of great resources to scientific research may help China to produce exciting technologies. But this might, as in the Soviet Union, be on too narrow a front. Many scholars (admittedly, western) have concluded that the motor for the rise of Europe was the free flow of ideas. A taste for iconoclasm and a refusal to accept convention may also have helped. CCP control is sympathetic to none of those. Culture, reinforced by politics, does not favour the unconventional. And with prioritisation of state-owned enterprises over the private sector, added to tightened party control over business, education and society, it is legitimate to wonder whether in future the likes of Huawei, Alibaba and Tencent will emerge as easily.

Some point to the CCP’s flexibility: in 1978, who could have imagined that it would slough off so much dogma? But there is an important difference between the first 30 years of reform and the last 10. Earlier, the interests of reform and of party members were heading in the same direction: much money could be made, legitimately and not so legitimately, by following the dictates of reform. Now, even with a restricted role for the market, they are heading in opposite directions. The war on corruption reinforces this.

The likelihood is that we have reached “peak Xi”, or perhaps “plateau Xi”, since China will continue to be a powerful country. In the recent words of Chen Deming, minister of commerce until 2013: “Do not take it for granted that China is number two, and do not make the assumption that we will be the number one sooner or later.”

What does this mean for liberal democracies? If China’s rise is not inexorable (nor its collapse inevitable: it will remain a major power), we must in the meantime be more resolute in defending our security, interests and values. We should resist any tendency towards pre-emptive kowtowing to China. We must promote what is essential for long-term prosperity, not least respect for international law, which China may further flout as its problems increase.

In sum, despite our present woes, we should have more faith in our systems. Their virtue is not English oak, but more Chinese bamboo: they bend in the buffeting winds, but don’t break.

Those who said that China’s rise would lead to convergence with liberal democracies are now accused of getting it wrong. But the obverse of the same coin, that unless China changes its systems, it has no chance of being a superpower, may be correct.


Charles Parton is a senior associate fellow of the Royal United Services Institute, a think-tank. He was an adviser to the UK House of Commons select committee on foreign affairs inquiry into China.

Some Luxury Brands Look Frayed Second-Hand

Discounts in the resale market can give investors clues about which labels need investment or won’t sustain their pricing power

By Carol Ryan


A Cartier Panthere watch. Brand owner Richemont met the challenge of the second-hand market by buying U.K. reseller Watchfinder last year. Photo: Stefan Wermuth/Bloomberg News


Websites that sell second-hand handbags and watches show shoppers quickly which brands hold their value over time. They should also influence how investors think about luxury stocks.

The market for second-hand luxury is growing fast. Independent consignment stores and traditional watch dealers have done a sideline in pre-owned products for decades, but e-commerce has paved the way for a more global breed of merchants. Sites like The RealReal, Watchfinder & Co. and Vestiaire Collective connect sellers with a deep pool of buyers world-wide, and are winning over consumers by hiring experts to authenticate products and restoring items such as watches to near-mint condition.



The resale market poses the biggest challenge for watch companies like Switzerland’s Compagnie Financière Richemont ,which owns Cartier and Vacheron Constantin, and Omega-parent Swatch. Second-hand watch sales amount to $3.3 billion a year, according to Credit Suisse estimates, equivalent to 10% of the entire market.

With deeply discounted watches readily available on the second-hand market, buying new looks less attractive. Cartier’s Panthère watch in yellow gold currently sells for $25,000 on the brand’s official U.K. website. A mint, virtually identical, authenticated model from 15 years ago is for sale on Watchfinder for a quarter of the price.

A related challenge is that greater transparency about which products don’t hold their value could undermine certain brands’ ability to raise prices in the primary market. That explains why watch companies are trying to exert greater control over second-hand trading. Richemont bought U.K. reseller Watchfinder last year for an undisclosed sum.

In an industry light on data, visibility on pricing also offers shareholders a reliable measure of how consumers view products and brands. In the case of watchmakers, the conclusion is a depressing one: Investors can’t buy into the best brands. Only privately held Rolex and Patek Philippe fetch a resale premium among the top-end names. Richemont’s timepieces don’t hold up as well, with some Jaeger-LeCoultre models discounted by as much as 40%.

Sales of used handbags, clothing and footwear are also worth roughly $3.3 billion a year, according to Credit Suisse, but that amounts to just 1% to 2% of the much larger market for so-called soft luxury. The second-hand channel therefore doesn’t yet pose a big threat to groups like LVMH Moët Hennessy Louis Vuittonor Gucci-owner Kering, which guard their largely proprietary distribution networks zealously. 






And pricing of pre-owned handbags often confirms what shareholders already know: Hermès, the priciest consumer stock in Europe, is the only luxury brand whose bags are more expensive in the second-hand market than they are straight from its boutiques. A Birkin bag—a product Hermès sells in carefully constrained numbers—is 7% more expensive on The RealReal than a new bag. Louis Vuitton’s Neverfull canvas tote also fares well despite being widely available: A discount of just 4% shows the brand’s strong cachet.

Other products are steeply discounted. Bags made by Italian labels Tod’s and Salvatore Ferragamoare marked down 60-70% in the second-hand market. That jars with racy stock-market valuations: Earnings multiples are roughly 30 times projected earnings for both brands. Takeover and turnaround hopes explain some of the froth. U.S. luxury companies Tapestry and Capri are on the hunt for European brands, with the latter having bought Versace last year for $2.1 billion. But shareholders could also be underestimating the brand investment that will be needed to win over shoppers.

Investors should keep a close eye on second-hand luxury-goods prices. The risk is that labels with a big discount could soon get a corresponding one in the stock market.


Bonds Could Be The Fade Of A Lifetime

by: The Heisenberg


Summary
 
- The world is in love with bonds, and it's not hard to understand why.

- The trade war is back (with a vengeance) and to quote one analyst, "nobody in the investing universe believes inflation is an actual ‘thing’ anymore."

- With 10-year US yields at their lowest since 2017 and analysts rushing to slash their year-end yield targets, it may be time to fade consensus.
 

Hate spreads faster than love and fear sells, which helps explain why April's "nascent reflation" narrative is seemingly dead and buried.
 
Thanks in no small part to trade concerns, this week saw the return of the late-March "growth scare" story, as told by bonds, whose "voice" is always pretty ominous at times like these.
 
10-year yields in the US pushed to their lowest since 2017 on Thursday. 30-year yields fell to the lowest since early last year. In Australia, benchmark yields hit a record low. German bund yields touched -11bp. And on and on. The purple-shaded boxes in the top pane of the visual denote, in order, the bond rally in late March and its ongoing sequel.
 
(Heisenberg)
 
 
Every locale has its own unique dynamics, of course. But the common thread is that renewed trade tensions effectively deep-sixed the economic optimism seen in April, when better-than-expected data out of China (e.g., March activity numbers and Q1 GDP) suggested the world's second-largest economy had bottomed, and was on the verge of inflecting. Recent data out of Beijing threw cold water on that story, though. Indeed, activity data for April showed the Chinese economy decelerating again, even before Donald Trump's latest escalations in the trade conflict.
 
"Our simulations show that the negative effects on US GDP rise to 0.5% with across-the-board 25% tariff on China and to 0.9% with a 25% tariff on all auto imports", Goldman wrote, in a note dated Tuesday, adding that "the all-in growth effects on China are similar to the US", although the math that gets you there is different. Here's a visualization of the projected GDP drag across regions and under different scenarios:
(Goldman)
 
 
A slew of downbeat data out Thursday underscored Bank of America's "mark to misery" justification for slashing year-end yield forecasts across the board. Japan's manufacturing PMI slipped back into contraction territory, the flash PMI for Germany in May printed below the expansion line for the fifth straight month, Ifo business confidence fell to the lowest since 2014 and then, in the final straw, Markit PMIs for the US missed estimates with the manufacturing gauge printing the lowest since September 2009.
 
Little wonder, then, that the world is enthralled with bonds. It's a love affair - a duration infatuation, if you Will.
 
But, as my buddy Kevin Muir (formerly head of equity derivatives at RBC Dominion and currently head of research of global and domestic investment products at East West Investment Management) put it on Friday, "the funniest part of this love affair with fixed income is that less than half a year ago [the smart money] was equally convinced bonds were heading lower."
 
In his note, Kevin cites JPMorgan’s Treasury survey, which shows client longs sitting at the highest levels since 2010. When you throw in Nomura's risk parity model (which betrays a 3-standard deviation DM bond allocation) and EPFR data which shows that since the Fed’s dovish pivot in January, global bond funds have seen some $160 billion in inflows, you can understand why the "love affair" characterization is being bandied about.
 
 
(Bloomberg, Nomura, EPFR)
 
 
But how much sense does this actually make? A lot, if you believe the global economy will indeed succumb to the trade war and roll over in earnest. However, do note that tariffs (and protectionism in general) are facially inflationary. Here's another visual from the Goldman note cited above which shows the bank's projections for inflation under the same trade war scenarios:
 
(Goldman)
 
 
In their own trade war update, Nomura's North American economists wrote the following (this is from a note dated Tuesday as well):

"We believe that the impact of the tariffs that are already in place – 25% on $34bn of imports imposed in July 2018; 25% on $16bn imposed in August 2018; and 10% on $200bn imposed in September 2018 – on consumer prices has largely materialized. The combined impact from the increase from 10% to 25% on $200bn in imports (tranche three) and the 25% tariff on the addition $300bn in imports (tranche four) is estimated to be large as the volume of imports subject to those changes accounts for about 20% of total US goods imports. Moreover, the composition of the fourth tranche is weighted more towards consumer goods relative to previous tranches. There appear to be few readily available alternative sources for many of the consumer goods included in the fourth tranche." 
The bank does note that the effect on inflation from the tariffs won't be permanent, but it could be "substantial" in the near term.

Now, consider the effect tariffs on the remainder of Chinese exports to the US will likely have on Beijing's decision calculus when it comes to stimulus. Thus far, China has avoided kitchen-sink-type stimulus, in the interest of not inflating bubbles, both in the real economy and in financial assets. But a piecemeal approach will become less tenable in the event the Trump administration turns the screws even tighter. Remember, there's a sense in which the global cycle (i.e., the reflation impulse) lives and dies by Chinese stimulus. If China does go pedal-to-the-metal (as it were) in a bid to offset the drag from more tariffs, that's inflationary.
 
Meanwhile, the Fed is of course conducting a policy framework review that many believe will ultimately lead the FOMC to adopt a modified approach to inflation which could include tolerating (or encouraging) overshoots to "make up" for previous shortfalls. This is a big deal, and it's going to start grabbing more headlines over the course of this year.
 
The point (in case it's not clear enough) is there are all manner of potentially inflationary dynamics on the horizon and, right now, you'd be hard pressed to find anyone who believes that inflation is going to suddenly come roaring back. Hence, the infatuation with bonds.
 
Well, if everyone is wrong when it comes to inflation, that bond "love affair" is going to look woefully offsides.
 
"What can drive yields higher? Inflation, which nobody in the investing universe believes is an actual ‘thing’ anymore", Nomura’s Charlie McElligott wrote Thursday.
 
It goes without saying that if the global economy does not in fact roll over, then the recent rally in bonds will be faded, potentially into the reflationary dynamics outlined above.
 
In that case, the bond overweight would be akin to lit kindling and any reflationary impulse from China, the effects of the tariffs and/or a signal from the Fed that policymakers will pursue "new" methods to avoid consistently undershooting their inflation target, would be gasoline on the fire.

I'll just close with a couple of additional excerpts from Kevin Muir, who I'm sure will be delighted to see them reiterated:

"Almost all of you will dismiss this as idiocy. I get it. Sentiment is so lop-sided I know this will not be warmly received. But back in October when I preached caution with short positions even though “Bond Kings” were selling with both fists, it also was derided. I have learned that sometimes you have to not worry about your reputation and just do what you think best. 
Remember, the hard trades are most often the right trades. And I ask you - what could be harder than fading the current bullish bond sentiment?"