The post below is the outline text sent for an article in the Australian Financial Review (AFR) looking at the triple threat faced by bond markets. As our recent posts have suggested, we see Bonds as the biggest short and medium term threat to equities, but more important we can see a situation where the yield curve steepens very sharply causing an existential crisis for many bond managers and their underlying investors.

In the latest Friday Market Thinking, we concluded that the biggest medium term risk to markets was likely to be bonds, given their historic tendency to damage other asset classes as they deleverage.

The economist Michael Hudson has a useful expression contrasting the Economic Models of the West with those of emerging Asia as Industrial Capitalism (Asia) versus Financial Capitalism (the West), where the latter is in effect a return to the rentier or landlord class of extractive capitalism.

Experts advising Pension Funds have become like SAGE advising the UK government. Using historic computer based models based around some simple prior relationships, they make predictions on which they base their policy advice.

As US and other equity markets continue to hit new highs, we see increasing examples of Cognitive Dissonance emerging, notably in the response to the US Election. Historically this can lead to a sudden switch in the ‘narrative’ which can induce sharp spikes in short term uncertainty.