The Thundering Word: Black Sheep & Black Swans • Secular macro backdrop of low growth & high debt means global rates "glued to zero" at 5000 year lows • Greece, Puerto Rico, China isolated "black sheep" events not contagious "black swans." • Absent Greek "oxi" weekend vote, SPX 2054 should hold near-term; equities 2-3% away from Breadth Rule contrarian buy-signal
The lowest interest rates in 5000 years
Chart 1: This week, market cap of MSCI Greece fell below that of Bed, Bath & Beyond, CDS of Puerto Rico jumped toward Venezuela & Greece, & 10 day loss on Shanghai exchange exceeded entire market cap of German DAX. Secular macro backdrop of low growth & high debt means global rates "glued to zero" at 5000 year lows (Chart 1). Black Sheep & Black Swans Cyclical mix of extreme monetary ease & gradual economic recovery means Greece, Puerto Rico, China isolated "black sheep" events, not contagious "black swans." US rate shock and/or global PMI's dropping toward 45 needed for contagion. What happens in China, stays in China June disobedience of Chinese investors to government stimulus attempts notable; and China travails clearly impeding leadership of global cyclical stocks. But until unambiguous evidence of macro policy failure & RMB devaluation, "what happens in China, stays in China." Q3 risk-on triggers Absent a Greek "oxi" vote this weekend, and respecting current losses/outflows in bonds, we expect SPX 2054 to hold near-term: investors positioned for correction; global stocks just 2-3% away from BofAML Breadth Rule contrarian "buy" signal; China policy makers to act aggressively in July. Chart 1: The lowest interest rates in 5000 years |
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Sources: Bank of England, Global Financial Data, Homer and Sylla "A History of Interest Rates" Notes: the intervals on the x-axis change through time up to 1700 - see page 3for methodology. |
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