Income and Fixed Interest Newsletter - BT Investment Management

In this month’s newsletter we look at the global deflation wave. We have been warning about the risk of deflation for many months now and central banks are finally waking up and smelling the putrefying corpses of their economies as this zombie-like plague spreads. Better get yourself max long bonds and US Dollars.

The market is currently offering up a wide range of attractive potential trades and our acute focus is on picking the best ones while ensuring we run a balanced portfolio. In terms of investor positioning we believe many investors are on the wrong side of these moves and to paraphrase Warren Buffett, the tide is on the wane and we are now in the environment where “...only when the tide goes out do you dis cover who's been swimming naked.”

Global growth is slowing, many emerging markets are getting close to crisis, volatility is rising, shorts in bonds are being violently squeezed and we haven’t even seen the equity market weakness I’m expecting yet. I thin k the next few months will be very key indeed. The last two months have been extremely important for markets. There has been a cacophony of unexpected events - from the steep fall in the oil price leading to deflation and unexpected rate cuts in many count ries to the biggest QE the world has seen, the break of currency caps and the first example of properly negative interest rates (resulting in a yield curve that is below 0% all the way out to 10 years).

These are crucially important events and it would be at your peril to ignore what market pricing and central banks are telling you. Our belief is that we are on the verge of a clear regime change in how the world thinks about monetary policy and the recent events will be only a trailer of what we will see ove r the next 10 years. Yields may appear low but the recent events have reinforced why you should own more bonds than you already do, and own as much $US as possible. I am maximum bullish bonds even at these levels. The seismic events are occurring because the zombie apocalypse has begun and is spreading. The zombie apocalypse is deflation - slow moving, but causes immense damage.

The recent panic moves that have been made by central banks around the world feel like useless attempts to hold back the disease of deflation crossing their borders, and this is only the start of their efforts because they know that once deflation takes hold and starts affecting expectations then your economy becomes zombified. If however your debt load is already very high (as it is in many developed economies around the world), then zombification could lead to an even bigger problem down the line as falling inflation leads to climbing real interest rates.

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