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Insight - Making Sense of the Narrative


In the internet boom investors chased stocks like Nokia, Ericsson and Cisco to crazy sales multiples that required growth to be not just good, but parabolic to deliver any returns. A small disruption to those expectations led to a profit warning and a crash in the market. AI is the new 'internet' and investors are once again chasing picks and shovels. However, when a market is putting China stocks on less than 1x sales due to 'concerns over China/Taiwan while simultaneously paying 40x sales for a company where half its customers and all its manufacturing is done in the region, there is something of a disconnect in the risk management.

Institutions that were regulated into buying bonds now find the same 'rules' forcing them to sell. The ultimate buyer won't be the Fed, but the trillions sitting at the short end of the curve and in Money Market funds. For them to move the Fed need to signal an end to tightening and a modest cut. More important is that the asymmetric nature of the bond math(s) is such that while a 50bp rise in yields would leave a 12 month return flat to down slightly, a 50 bp drop would give double digit returns. For bond investors not forced to sell because of regulatory rules, this looks compelling and we suspect that many are thinking that, either when the selling stops or the Fed signals there won't be a second chance to get that duration trade on.

We remain unconvinced that Central Banks are raising rates in recognition that their previous policy of zero interest rates not only failed but backfired spectacularly. Indeed, we sense that they are simply chasing reported inflation rates higher risking equal and opposite damage and disruption t omarkets and economies. With the latest inflation numbers coming in weaker, expectations of aggressive tightening are thankfully weakening. For countries with highly rate sensitive household sectors as short term fixed rate mortgages roll off, this would be a major blessing.