Bonds: Negative yields say inflation is dead. Oh really….?

exploding inflation

As more than 15% of the global government debt market enters negative yield territory we are truly living in extraordinary times. The corollary of those conditions is that the market is in effect pricing in no inflation. Oh really?

WealthiFi would take the opportunity to make a few observations which in time might merit some reflection…

1. Does it feel like things we “must have” are becoming more expensive? Think health, insurance, education, water, food, urban housing, digital connectivity, waste disposal, transport and….. tax in all its guises to support the very same borrowing/debt which currently boasts negative yields.

2. Discretionary spending in the world of retail, manufactured goods, finance, toys, clothing fashion, media and traditional telephony might be experiencing structural deflation but they kinda feel like small cost items versus the big cost items listed in point 1.

3. We are bombarded with headlines about income inequality but the bottom line is that the median citizen/family is being squeezed.

4. The global economy is undergoing an “equilibrium-finding” process as malinvestment and huge debt is being absorbed. The ordinary citizen/consumer is funding that adjustment.

Now the question is are we getting close to that equilibrium point? At what point does the critical metric of inflation, wages, begin to reverse trend as the “social contract” is broken? Here are a few developments worth watching…

1. Wal-Mart announces wage increases for 500,000 workers and abandons the minimum wage as being clearly not in touch with the reality of living costs or the creaking viability of its own business model.

2. Weekly US wages grew(+1.2%) the most in January since Lehman’s collapse in 2008.

3. Germany’s huge IG Metall union has just achieved a whopping(vs no inflation?) wage hike of 3.6%.

4. Wage growth in UK now outpaces inflation by widest margin since 2008.

As we often write on WealthiFi “certainty” is a dangerous mindset in markets which breeds risk but also opportunity for the curious. Negative bond yields are clearly a very “certain” view on inflation and that’s where we see opportunity…..




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