The bond vigilantes are sheep. They are acting now as a weak herd driven to safety without regard to long-term credit risk and debt issues. The assumption by many bond managers is that their vigilante behavior can come later after the current risk crisis is over, but this view misses the point. The crisis is a balance sheet credit problem and not a classic inventory problem. Macro risks are swamping credit risks but the macro risks are based on sovereign credit risks. There is feedback loop of crdit problems and then an economic slowdown. Rates have fallen, but there will come point where bond holders are not being compensated for risk. Riding momemtum in this environment is risky.
The government knows this, so there is a movement to financial represssion. Cut-off all private avenues of safety so the only investment that may have some modest safety will be government bonds. Make holding private debt more risky through regulation and the only choice is the government. Under this repression scenario, negative real rates will exist and wealth will be taken from creditors. Redistribution will occur between the rich and poor through inflation taxing not income taxes. The vigilantes are not ready to press their case, but then it may be too late already.
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