Global View The Trillion Dollar Bash & The Second Leg Down February 2018
The Trillion Dollar Bash & The Second Leg Down?The 'big' risks centre on US bonds. Bond markets essentially have two moving-parts - policy interest rate expectations and term premia. A strengthening economy and rising inflation pressures are already raising the trajectory of the Fed's forward guidance. However, this is occurring against a backdrop of very low (negative) Treasury term premia that have been unusually depressed by the Fed's LSAP and recent flight capital into US dollar assets from Europe and Asia. We are concerned that these benign influences on term premia are likely to unwind sharply as reverse QE engages, at a time when both the Trump fiscal deficit is swelling towards US$1 trillion and capital is exiting the US in search of economic acceleration elsewhere. US 10-year Treasuries will test 3.5% yields and the 10-2 curve will steepen. For equities, this could mean a second leg down. Bonds matter. And, China matters!
CrossBorder Capital Ltd (CrossBorder) is a London based, FCA registered, independent investment firm founded in 1996. It is owned by its partners and has no affiliations with banks, stockbrokers or other financial institutions.
CrossBorder's core competence is the measurement and analysis of global liquidity flows. Liquidity is a source of funds, in contrast to money which is a use of funds. It is defined as the flow of cash plus credit, or more explicitly as savings plus the change in base money plus the change in bank credit. Liquidity is therefore a more comprehensive measurement of fund flows than the monetary aggregates used traditionally. Liquidity research is applied to determining the outlook for a range of asset classes including equities, fixed income, currencies and hedge fund styles over varying time horizons.
Central to this analysis is the monthly collection and analysis of balance sheet data from over seventy of the world's central banks to quantify the level and direction of liquidity in each country. This data is publicly available, aggregate as opposed to sample, and rarely significantly revised. It is also little used by investors, and CrossBorder's prime utility is bringing this set of data to investors in a timely and user-friendly way.
CrossBorder's insights rest on two philosophical assertions: first, there is a regular cycle of liquidity, and asset class price movements tend to move sequentially over the cycle. By measuring where we are on it, we can significantly reduce 'fat tail' outcomes in our predictions for asset price movements. Secondly, weightings of asset classes held by investors in aggregate tend to revert to the long term mean. By measuring the variance from this mean, we can understand whether a particular trade is 'crowded' or the reverse.
CrossBorder offers these insights both as the Liquidity Research research service, and in the form of systematically allocated in-house funds. Clients of the Liquidity Research service include leading banks, fund managers (both traditional and hedge) and insurance companies located worldwide. CrossBorder additionally manages and advises on tactical asset allocation products for third parties.
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