<< Read Part 1:Â The 5 Most Crowded Trades On Wall Street
Bonds
The most crowded trade on Wall Street, the globe, or a beach in Brazil is the Bond Yield Chasing/Price Appreciation trade. This sector or asset class is an absolute bubble, the magnitude of which has never been seen in a mainstream asset class, and one that is deemed conservative and safe by investors which makes the tail risk for these assets off the charts. We literally are looking at an 8 sigma event down the road in this asset class.
Liquidity Bubble
It is driven by a liquidity bubble, there is just far too much capital via cheap money sloshing around financial markets with no place to go, and this has been the case for the last five years. And now that Japan and Europe have jumped on the QE bandwagon the last several years, the liquidity bubble just keeps growing. Investors have made a boatload of money over the last 7 years with Global ZIRP and each year they keep needing bigger asset storage places to put all this paper wealth.Â
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Central Banks Irresponsible Promotion of Risk Seeking Behavior
The problem is that central banks let this get so out of hand and frankly are freaking clueless as to the magnitude of the problem that they have created that future losses on European bonds alone I surmise makes all European banks completely insolvent once these bonds that have little to no reserves set aside to offset future losses are marked to market 10 years from today.
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| US 10-Year Bond Yield (1970-2015) |
Complacency
The fact that financial markets have become so complacent due to a leading Central Bank in the US Fed being ultra-dovish that even in changing language for a rate hiking cycle they will go out of their way to be seen as dovish. This is ridiculous, is the financial system that fragile after 7 plus years of ZIRP? It shouldn`t matter to financial markets whether the Fed will bend over backwards for a 25 basis point rate hike at this stage of the recovery process! This should be worrisome to the Fed regarding just how far markets are off sides with dovish complacency, and the ridiculous need for hand holding from the Federal Reserve.
