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G10 Macro Rates Blog – The World is Desensitising

Thursday, December 19, 2019

Latest G10 Macro Rates Blog
With Shayne Dunlap, Co-Portfolio Manager

Trump was impeached last night, the third president in US history, however the market couldn’t have cared less. FX and rates unchanged, nada, flatline. The partisan lines are so heavily drawn that they may as well be the fictional “wall” between the US and Mexico.

The worrying sign here is that the world is desensitising, and nothing seems to shock it. Not a Presidents' moral compass veering significantly off the path, nor new unstable nuclear powers, nor mass human migration and its domino stresses, seem to raise a pulse. The volatility markets and credit markets agree: Lowest margin ever on investment grade (CDXIG) to US treasuries; Gold volatility (GVXX); Equity volatility (VIX); Rates volatility (TYVIX). These indices are all at, or near, multi-year lows. 


Is the faith in our fundamental financial institutions that robust to trust the imbedded fail safes? All I observe is an increasing politicisation of these institutions. Direct attacks by politicians via media and other forms are now a daily occurrence on the Central Banks, WTO, UN and High/Supreme Courts. If anything, they are being undermined and eroded of their historical autonomy and trustworthy power. Will these institutions be able to coordinate in a “non-partisan” manner when the next financial crisis comes our way?

You would have thought that at last week’s UK general election 2019, with national issues of great importance to our future, that every man, woman, young adult eligible to vote – would have. However, the voter turnout was just 67.3% and unbelievably, even lower than the snap election and subsequent disastrous campaign of Teresa May in 2017. This apathy, in a polarised political landscape, points to political “burnout”.

Another example of underappreciated change can be thought of in terms of a modern analogy. Many people are quick to point fingers at violent computer games desensitising the youth when a particularly brutal gang murder makes the news. However, we seem oblivious to our own computers taking a substantial, and continually increasing, grip on the liquidity of our markets. Their exposures via ETF’s, index trackers etc are now significantly higher than the liquidity of the underlying constituent shares or bonds. Our desensitising has crept in slowly under the guise of automation and financial engineering. This quiet evolution has led us to a world where passive funds dominate the investment landscape and don’t have the ability (or prospectus) to ignore a breakdown of logic. These funds don’t have the access to an escape path to prevent making a bad scenario far worse.

Some old market dogs have been talking on the wires lately, they express a fear, a fear that something is not right. They are not comfortable with the state of play; Central Banks near the end game on policy; risk measures at lows; markets making new highs. The problem is they stay fully invested because they don’t know when the music may stop and can’t see a smoking gun. After a decade of having passive outperform, they can’t afford to be left in its wake if the rally continues. I have traded through my fair share of major market melt downs, no-one ever sees the smoking gun till the bullet hits its target.

Source: Pacific Asset Management and Bloomberg.

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IMPORTANT INFORMATION: Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.

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