The Timing of the Next Recession and The Negative-Yielding Bond Bubble


(B) I watched Blackstone Q4 quarterly webcast on the financial markets. That webcast was prepared by Blackstone’s Byron Wien and Joe Zidle (I listened regularly to Byron Wien to understand the trends in the capital markets).

You can look at the slides of the webcast here. Following is the video of the webcast:



Quick summary, and two key takeaways:

The timing of the next recession

First, although the recession signals are getting stronger and stronger as the worldwide economies are slowing down, we are not yet at the beginning of a recession.

Out of the three primary indicators for a recession from Blackstone, 2 are in the red (the economic indicators and the yield curve), while out of the four secondary indicators, only one (consumer confidence) is in the red:


The negative-yielding bond bubble

Second, sovereign bonds have been the new bubble. As noted by Joe Zidle, “The Last Stage of a Bubble is Acceptance“. A year ago, the 10-year US Treasury yielded 3.2%, and essentially only Japanese bonds yielded less than zero. Today, negative-yielding bonds total globally over $16 trillion, with issuers ranging from Austria to Slovenia.

Despite those negative rates (meaning that instead of receiving an income from a bond that you own, you are giving back the income to the bond issuer, and you will lose the principal when the bond is held at maturity), massive inflows have continued over the summer.

Look at the growth of the following price of the 100-year Austrian government bond:



Earlier this year, Professor Nouriel Roubini discussed the present challenges of the debt markets “The Mother and Father of All Bubbles“:

“There is…buildup of debt across the world…Some emerging markets are highly leveraged, either in the private and/or public sector, and in Europe we still have some countries where public debt if there was another economic downturn, could be a source of significant stress. And the first country that comes to mind is Italy. Its government is pursuing populist policies that will eventually lead to recession. The debt dynamics may become unsustainable as well.

And, the IMF, in its October financial analysis report, warned that fixed-income funds are vulnerable to liquidity shocks and put the global financial system at risk:

“Global markets have been subjected to the twists and turns of trade tensions and have been kept off balance by continuing policy uncertainty. Against the backdrop of deteriorating business sentiment, weakening economic activity, and intensifying downside risks, many central banks have adopted an easier stance on monetary policy. About 70 percent of the world’s economies, weighted by GDP, have done so.

Investors have interpreted the central bank actions as a turning point in the monetary policy cycle. The shift has been accompanied by a sharp decline in long-term yields. In some major economies, interest rates are deeply negative.

Remarkably, the amount of government and corporate bonds with negative yields has increased to about $15 trillion. Moreover, markets expect about one-fifth of government bonds will have negative yields for at least three years.

With rates staying lower for longer, financial conditions have eased, helping contain downside risks and support global growth, for now. But loose financial conditions have encouraged investors to take more risks in a quest to achieve their return targets. Valuations appear stretched in some important markets, including equity and credit markets, in both emerging and frontier, as well as advanced economies.

As a result of easier financial conditions and stretched asset valuations, vulnerabilities have continued to intensify, putting growth at risk in the medium term…

The search for yield among institutional investors, such as insurance companies, asset managers, and pension funds, has led them to take on riskier and less-liquid securities. These exposures may act as amplifiers to shocks.

In addition, corporations are taking on more debt, and their ability to service that debt is weakening. In the event of a material economic slowdown, the prospects would be sobering. Debt owed by firms unable to cover interest expenses with earnings, which we refer to as corporate debt at risk, could rise to $19 trillion in a scenario that is just half as severe as the global financial crisis.”

For additional analysis of the statements from the IMF, read the following article from the Financial Times.

Note: The picture above is Tapei 101 in Xinyi, Taipei.

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