Meeting of Minds – February 2018

Published on: February 28th, 2018

This month, Julian discusses why he thinks this volatility is more than a flash in the pan, explaining the ultimate sensitivity of equities to both higher volatility and higher bond yields. For Raoul, the business cycle is long in the tooth. He sees any rise in bond yields as destructive and expects that disruption to sow the seeds of another phase of policy intervention and lower bond yields.


  • AC
    Andrew C.
    1 March 2018 @ 12:03
    "This week’s testimony by Jerome Powell to Congress will have hit the wires by the time you read this." Are there any additional comments you can share today? thanks
    • DD
      Derek D.
      13 March 2018 @ 16:36
      While waiting for his reply we could muse about how much easier he is to listen to than the droning hobbit.
  • RI
    R I.
    2 March 2018 @ 20:18
    Nice report; first thumbs up I've given in a while. However, I wish Raoul would not have attributed the dollar bear market (which has been underway for a year now) merely to the Treasury Secretary's recent comments. Sure, it paints a narrative for the dollar's move that particular trading week during Davos, but avoids acknowledging the reasons for the prior 12 months worth of dollar weakening. Question for Julian: why have real yields risen by more than inflation expectations? 10-yr yields are up 80 bps since last September's low. TIPS yields are up 47 bps over the same period, implying that rising inflation expectations only represent 33 bps of the 80 bps increase in 10-yr nominal yields. How do you reconcile this rise in real yields? Is it mainly due to higher real growth expectations, higher term premiums or rising twin deficits? Thank you.
    • JB
      Julian B. | Contributor
      5 March 2018 @ 20:34
      Hi R.I as per above sorry for the delay. So in terms of the difference between nominal yields and inflation expectations i.e. 50bps almost all of that can be explained by the rise in the Term Risk Premium we discussed. Back in early Dec this hit -60bps and recently topped at -17bps. If you don't have Bloomberg you can see the numbers here: . As we explained in the piece we think a lot has to do with the rate of change in the ECBs balance sheet and how that effects European investors buying of treasuries.
    • DD
      Derek D.
      13 March 2018 @ 16:34
      To Julian's reply below, would this perhaps mean that a pivot back to dovish (on the margin) from the ECB (or the BoJ) could take pressure off of US yields?
  • AC
    Andrew C.
    1 March 2018 @ 12:07
    Julian; What will rising rates do for the European Banks ? Rising rates generally raises bank stocks.
    • JB
      Julian B. | Contributor
      5 March 2018 @ 20:24
      Andrew sorry I just saw this so apologies for the late response. So you are right in general higher yields = higher bank stocks. However, there is one caveat....speed. In Q2 2015 German Bund yields shot from zero to 1% in a matter of months. The problem was that the move was so rapid that while bank stocks initially rose they were eventually caught in the 25% collapse in the DAX. Yes they still outperformed but in the end ONLY on a relative basis to the rest of the market. Hopefully, that won't happen again. Bottom line, you can be long the banks but be ready to hedge the position via a DAX short if the broad market starts to wobble.
  • MG
    Matteo G.
    5 March 2018 @ 16:31
    I have to say that Julian's view is clearer and more convincing than that of Raoul. Raoul clean your deck and start from scratch instead of mixing conflicting short term and long term views.
  • AD
    Anthony D.
    4 March 2018 @ 17:39
    Excellent piece. You,ve both given us a well illustrated view of the state of affairs as you see them. Raoul, do you include the miners in your gold allocation? Some regard these as a call option the the metal. Julian you mentioned the dangers of TBT. There is also TBF, a non-levered short bond ETF.
  • AD
    Allan D.
    4 March 2018 @ 01:50
    I enjoyed the content in this, but if you’re giving us old GMI articles at least update the charts, some were from the end of December.
  • RB
    Richard B.
    2 March 2018 @ 14:49
    How many lines in the sand are you going to keep on drawing on those Dollar charts Raoul?
    • EF
      Eric F.
      2 March 2018 @ 15:33
      He says he’s stepped away from the trade Richard, so what more do you want? Just because some of the underlying facts haven’t changed he’s entitled to voice his opinion. If you disagree, don’t knock him, simply short the dollar. I’m keeping an open mind on this one.
  • gg
    gurdeep g.
    2 March 2018 @ 10:03
    Have a feeling Julian's EEM trade idea may start to unfold now
  • AM
    Alonso M.
    28 February 2018 @ 19:48
    This is very helpful commentary and provides a logical and consistent framework with which to analyze financial markets. With this, one can weigh not only the probabilities of certain events but also the financial outcomes of such events. I really liked this piece.
  • LD
    Lance D.
    28 February 2018 @ 15:48
    proper enjoyed this , this has cleansed my tiny brain and brought all the articles nicely back in line.. nice