bonds

The potential for a state and municipal fiscal and public pension crisis is a defining issue for the next downturn. Underfunding guarantees problems. The question is whether the next downturn crystallizes a crisis.

Albert Edwards says the Fed will tighten more aggressively. The increase in interest rates will be a stimulant at first. But eventually, the higher rates will catch up with debtors.

This month, we have seen an unprecedented increase in volatility. When the fundamentals take a knock, that’s when we should worry though. Let’s wait for the CPI next week and revisit this conversation.

Yesterday’s market meltdown - and today's reaction - reduces the risk that the Fed will over-tighten, taking froth out of an over-extended market.

Powell mentioned financial stability as a concern as he was sworn in today. With markets taking a dive, it’s not clear what that will mean in terms of policy.

When defaults begin to rise and the economy begins to slow, we will find out whether deficits really drive rates higher or cause inflation to rise and remain high.

Everyone is bond bearish these days. Alan Greenspan is because he expects inflation. But this will mean tightening that risks derailing the US economy in 2019 and beyond.

The position I have stressed is one that is counter to the bond bear market narrative. But, that is longer-term. Shorter-term dynamics are bond bearish.

"Basically, with the Fed and the other central banks flooding the world with money, a rising tide lifts all boats." So it's the tightening we have to fear.

Bridgewater Associates' Ray Dalio warned that a rise in bond yields could lead to the biggest crisis in fixed income markets in almost 40 years.