An analysis of the Bank of England governor’s statement – was he talking to the global markets or just to the Pension funds? – part 3
By Marica Micallef
So, people believe that many market participants are panicking when, in fact, the FED has quietly sent 3.1 billion to Switzerland via a swap line, most likely for Credit Suisse. So, as Bank of America Chief Investment Strategist Michael Hartnett put it, when central banks panic, the markets stop panicking.
Mohammed El-Erian, who used to run the Pimco bond funds, said that “The economy is starting to go through the windshield”, blaming the Federal Reserve for a completely avoidable crisis. He means that instead of tapping on the economy’s brakes, they were going very fast, and now they’re slamming on the brakes, and whoever is in the car is flying out of the windshield if they don’t have their seat belt on.
This is demonstrated by the fact that the FED is moving historically quickly to tame inflation because they waited far too long, and so in other times, to get through a 3 percentage point move in the FED funds rate, whereas previously it took at least 12 months, 24 months, or even 26 months, it took them only five months in 2022, and that is what he means when he says “slamming on the brakes and people falling out through the windshield.”
According to them, credit market cracks are beginning to appear as three companies withdraw from the sale of investment-grade bonds. As a result of the current bond market volatility, companies, including investment grade companies, are deferring bond sales.
The corporate bond market distress indicator currently shows that investment grade is not even as stressed as high yield, while investment grade is breaking away from high yield.
This echoes JP Morgan’s Jamie Diamond’s prediction of a U.S. recession next year and credit market panic, which could lead to another 20% drop in stock value. He stated:
“The likely place you’re gonna see more of a crack and maybe a little bit more of a panic is in credit markets.”
So, could the problems in the UK bond market spread to the US? Yes, and it appears that they already are.
Bonds are supposed to be the safer, less volatile asset, and when you lose money in bonds, you sell the riskier stuff, which is stocks.
I don’t believe we have seen stock market capitulation, so I wouldn’t swing for the fences or go all in on some minor market dips here and there.
I believe we have a long way to fall before this thing bottoms out.