Tuesday, April 29, 2014

SIFIs Make Double-Dumb Bet On Fixed Income

The biggest investment banks prove they are willing to follow the bond market to oblivion.  They have just doubled-down on reorganizations that commit to even more bond underwriting.  The comment at the end of that article shows some rare sanity in a financial sector gone mad.  These dumb banks are betting that huge sovereign debt issuance will continue as interest rates rise, and that said rising rates will entice investors back into fixed income.

I won't restate my long-held contention that central bank stimulus has driven global bond markets far past their natural equilibrium points.  Go read some of the World Bank's regular reports from 2013.  I sure did.  The end of this historic coordinated stimulus means the end of excess profits in bond underwriting.

It's even more amazing to see the SIFIs unwind their commodity operations to make room for bond desks.  Commodities are useful hedges in hyperinflationary periods.  Going long in fixed income with no commodity exposure was the kiss of death for investors who lived through hyperinflation in Weimar Germany.  I will not feel one ounce of pity for the spoiled preppie bond traders who are going to lose their shirts.  They all have it coming to them.  A run on the US dollar will not treat Wall Street kindly if this is what passes for strategy.