As we head inexorably for the day that all romantics hold dear to their hearts another event associated to that date, The St Valentine’s day massacre, has sprung to mind. The massacre in legend is when Al Capone brutally murdered 7 of Bugs Moran gang, but in my memory a date earlier in February started a financial massacre,February 4th 1994 . I can remember the unearthly, almost primal, scream that emanated from trading floors across the globe when the Federal Reserve unexpectedly moved rates upwards that day back then.
That rise was the first that the market had seen for nearly 6 years whilst the authorities had tried to waken the sleeping economy and housing market in America with artificially low rates. All of sudden the cheap financing of long dated bonds went and there was a mad dash for the exit. As always in a panic some didn’t make the door in time, great names such as Kidder Peabody and the hedge fund Askin failed to.
People argue that it can’t happen again and 1994 was prehistoric when traders relied on little green numbers on a screen and the sophistication of computers , derivatives and rocket scientists will these days save the world . Well, here’s a thing, none of these saved Lehman Bros or many of the other casualties of the last crash in 2008. Being prehistoric myself I almost felt safer in a world where complex derivatives structures were normally the basis bad Breakfast cereals not instruments constructed to bamboozle those seemingly less bright .
As a humble commentator it appears to me that the world is set for yet another severe shock to the system where we discover that the masters of the universe are really just Emperors with no clothes. Whatever your political views it seems clear that President Trump is embarking on a massive building and rebuilding project across America. I am not just referring to the proposed wall but the more important reconstruction of America’s heartlands where infrastructure has declined for many years. Whether you agree with the policy or not two things are certain there will be an inflationary push to not only wash but also raw materials .As night follows day inflation equals higher interest rates which must lead to higher bond yields.
As in 1994 this is not just a problem in America. Japan has its own problems but the disaster that is Europe as well as The UK’s withdrawal brings a whole new dimension of worry. Italian Bonds have been edging up in the last few months and are now back at levels that were last seen around July 2015 , at the height of the Greek debt crisis or should I say the nadir ? This time though things are slightly different as there is more political uncertainty in Italy than in 2015, with elections soon as well as the looming reawakening of Greece’s well documented troubles.
The United Kingdom also faces some difficult choices as imported inflation, mainly due to the drop in the Pound’s value, must push rates up. Having grown up in the markets when Interest rates would often be in double digits, to control inflation, I fail to understand how The Bank of England thinks that it will control inflation with interest rates at 1% or 1 1/4%. I think maybe 3% or 4% would be in order and although the markets are run, rightly so, by much cleverer and younger people than I it’s hard to find someone who disagrees with this logic.
It seems somehow fitting that I am writing this on a miserable February morning when, almost 23 years to the day of the first major shock. Of course one cannot predict or probably even dream of the event that in the future people will inexorably link with the upcoming massacre but I, and many of my peers, are convinced that we have seen the highs of Bonds for many years to come.
One memory sticks in my mind above all others about February 1994. I was sitting in a beautiful French fishing village called Honfleur, on the Sunday after the Fed rise, enjoying a winter’s evening. I out of the bluegot a call from a client in Bermuda to give me instructions for the next morning .He sold coldly and calmly “Just get me out, I don’t care about the price, just get me out “. They say history repeats itself; now guess where I am taking my wife on Valentine ’s Day this year?