Dante Alighieri he was a poet but also a passionate political scientist and cultured philosopher. Leopardi he wrote the Infinito but also the Discourse on the present state of Italian customs, an extraordinarily topical historical-anthropological essay. Every painter of Christianity has painted in his life sacred art but also profane art. Michelangelo he was a painter but also a sculptor. Mozart, like many other musicians, wrote sacred music and music for almost licentious comedies. Marie Curie she received the Nobel Prize for physics in 1903, but this did not prevent her from also receiving the Nobel Prize for chemistry in 1911. In the world of capital management, on the other hand, there is a very strict separation of careers. Those who enter the world of bonds as an analyst or manager at a young age may retire as a CEO, central bank governor or poacher, but they will never retire as an equity manager. And vice versa, of course. Anyone who starts out in equities will never end up in bonds. Either here or there.
It doesn't matter if the real world is not discrete but continuous. Nature proceeds by hybridization and occasionally generates ambidextrous. The capital market is also increasingly generating hybrid instruments such as contingent capital bonds, today bonds and tomorrow, where appropriate, shares. Study centers such as Bruegel have long been proposing the equitisation of the European public debt, the same thing that Tsipras is asking of his creditors for the Greek debt. The repayment of the bonds, proposed by many, should remain at 100 only in certain particular circumstances, in all the others it would be indexed to some variable. For strange circumstances, in any case, everything that is hybrid is still followed in our world only by analysts and bond managers. Even when the hybrid is much closer to equity than to obligation, as in the case of corporate debt desolved or in receivership, the jurisdiction is never joint and it is only the credit analyst who deals with it. And credit analysts live on the bond planet, go to lunch and coffee only with peers in their industry, and read only published studies by bond workers. Equity specialists don't say it outright, but in their hearts they find the world of bonds desperately boring. Bond specialists, for their part, out of politeness never say out loud that they consider stocks basically not serious and desperately prone to emotion, dreams and, in serious cases, delirium.
We then proceed proudly separated. Lawmakers, as soon as they can, put higher and higher barriers between the various worlds. Strategists can study the forest, but woe to them if they expound on the individual trees that make it up. Equity and bond analysts must stop at the single tree and if they want to take a look at the forest they must do it in their spare time and in strictly private form. In any case, the one between bonds and shares seems to be the distinction between the two hemispheres of the brain. Bond specialists think with the left hemisphere, the one that engineers do. Stock specialists use the right hemisphere instead, poet and artist. Serious neurosciences explain to us that it is a distinction from afternoon television pop psychology and that everything is actually much more complicated. The two hemispheres, it seems, have some areas of specialization, but they interact all the time. The one on the left, for example, is better at exact calculations, the one on the right at approximate ones. Both, depending on the circumstances, are essential to survival. In this moment of confusion, maximum collaboration between the two hemispheres would be necessary, but bonds and shares are experiencing different psychodramas and give different readings of the single underlying reality. European equities are very worried about Greece and fear that its eventual exit from the euro is the prelude to the overall disintegration of the European project. Draghi's Qe could do very little against this disintegration. Bonds (and exchange rates) don't attach too much importance to Greece and on the contrary seem increasingly convinced of the effectiveness of Draghi's Qe in creating inflation.
In a month the yield on XNUMX-year Bunds has passed from zero to one percent, a colossal movement. If the cause were Greece (and the Euroland crisis) we would see a generalized race for quality, with negative yielding Bunds and ever-increasing periphery spreads. This is not the case, at least for the moment. In recent days, the spreads of Italy and Spain have even narrowed. European bonds, therefore, are now part of a global movement to raise rates, which has already been underway for four months in the United States. It is a movement that has been awaited for years and which, however, leaves one perplexing in terms of timing if one considers that the global economy has slowed down precisely in these four months. Some try to explain the fall in bonds with the United States continuing to approach full employment, a good news that brings with it less good news, the start of a rate hike by the Fed. Stop everyone, he says at this point Jeffrey Gundlach, a bond manager as good as he knows he is. This rate hike thing, he says, is an intelligence test. On the one hand the stupid, those who think that the rise in policy rates will raise all rates, including long-term ones. On the other, those who have understood, that is, those who know that long bonds, far from fearing it, are begging on their knees for a rise in short-term rates. Indeed, the rise will curb inflation expectations and thus favor ten-year bonds.
The Fed, which postpones the hike, is therefore good for equities and credits, allowing them to float on the current high levels, but harms long government bonds. Gundlach says the Fed, terrified of leaving zero rates, won't touch anything this year. The reasoning is suggestive, but it is based on a premise, the inaction of the Fed, yet to be demonstrated. In fact, the majority of the Fed board continues to send signals in the opposite direction and some economists who were radical doves until yesterday, such as Ellen Zentner of Morgan Stanley, postpone the first increase here from March to December. The feeling is that the next few months will be quite nervous for the markets. Year-on-year inflation, the one most watched by everyone, will rise towards two percent in America towards the end of the year and keeping rates at zero will be increasingly embarrassing for the Fed. If the probable rise in December takes place in a context of a re-acceleration of growth, the stock market will absorb it quite well. If growth is mediocre, the stock market will suffer. In such a fluid situation buying long bonds will only become interesting as a hit and run. From now on, in any case, quality government bonds will be preferred over corporate ones. As for the stock exchanges, Europe seems to us to be preferred, while America, on the highs, can be reduced. On the exchange rate between the dollar and the euro, we still don't seem to see the conditions for a breakout either upwards or downwards.
