Back when I worked for a large well-known company I was pulled aside by an economist during a presentation on the bond markets and told, “You are not an economist”. I humbly agreed.
Years later that brief conversation still resonates with me. Please excuse my French. No, I am not an economist nor am I a weatherman, but I still look at the damn radar images for myself.
The bond market is not a single market but instead made of many different markets. They are pushed, pulled and twisted in a multitude of ways, some well understood and others less so. Certainly, central bank interventions have deformed the markets to a large degree. However, these markets can still tell us a lot about investor sentiment (the herd) regarding economic factors. Simple “risk on” or “risk off” investor sentiment or fund flows into or out of specific investment themes such as inflation protection products can tell us so much about perceived economic risks. In my view, the potential for tactical investing opportunities can be elevated as sentiment swings.
Still I have real angst. Are the current markets reflecting the economic realities we face? Are the lack of investment choices in this low rate environment causing a real pickle? Corporate defaults are rising but investors have put tons of cash into both the investment grade and junk bond markets. Doing so at yields that don’t compensate for the risk. Municipal bond defaults are rising and municipalities face an uncertain COVID and post COVID economic reality. Yet, investors continue to sink hard earned in cash into municipal bonds and funds. Again, they are doing so at yields that don’t compensate for the risk. Is inflation a real concern or one that we simply need to monitor? Investor fund flows into inflation protection products tell us some of the herd do indeed worry about the threat. What will a weaker U.S. Dollar mean for me and my investments now and in the future? How much weaker? When? Lots of questions and no real clear answers. There never is.
Like many investors I pay attention to economist views and perspectives but sometimes I wonder why the economist world and market participants don’t align? Of course, they won’t and don’t. Differing views among economists and differing views within the markets are, well, what makes markets. The dynamics at work; one theoretical until and if it happens and one real life where it can be good, neutral or it can hurt so bad to be wrong. I may not be an economist, but I darn sure like looking at the radar myself.
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