Macro and Credit - Dissymmetry of lift

"Risk is trying to control something you are powerless over." -  Eric Clapton

Watching with interest the latest US GDP rising at an annual rate of 4.1 percent in the second quarter of 2018 while seeing Europe decelerating, with France kissing goodbye to its 2% annual growth target, when it came to selecting our title analogy we decided to go back to using our much liked  aeronautics/aerodynamics themes given it had been a while we didn't on that blog (our previous favorite one was "The Coffin corner" in April 2013, the other being "The Vortex Ring" in May 2014). The "Dissymmetry of lift is used in rotorcraft and refers to an uneven amount of lift on opposite sides of the rotor disc. It is a phenomenon that affects single-rotor helicopters and autogyros in forward flight. Balancing lift across the rotor disc is important to a helicopter's stability (or economic growth). The amount of lift generated by an airfoil is proportional to the square of its airspeed. In a zero airspeed hover the rotor blades, regardless of their position in rotation, have equal airspeeds and therefore equal lift. In forward flight the advancing blade has a higher airspeed than the retreating blade, creating unequal lift across the rotor disc. When dissymmetry causes the retreating blade to experience less airflow than required to maintain lift, a condition called retreating blade stall can occur. This causes the helicopter to roll to the retreating side and pitch up (due to gyroscopic precession). This situation, when not immediately recognized can cause a severe loss of aircraft controllability. You are probably asking yourselves already where we going with this but QT, in our book amounts to less airflow required to maintain growth in Emerging Markets and Europe. Dollar liquidity is being reduced, hence the risk for a stagflationary outcome, in essence stalling growth can and will occur.  To reduce dissymmetry of lift, modern helicopter rotor blades are mounted in such a manner that the angle of attack varies with the position in the rotor cycle. However, there exists a limit to the degree by which "Dissymmetry of lift" can be diminished by this means, and therefore, since the forward speed "v" is important in the phenomenon (like "v" for velocity), this imposes an upper speed limit upon the helicopter or for our central bankers of this world and their "helicopter money".

In this week's conversation, we would like to look at the rise in stagflationary risk, particularly in Europe with signs as well of a global slowdown.

Synopsis:

• Macro and Credit - Is a stagflationary outcome looming?
• Final chart - Coming soon - bids by appointment only...

• Macro and Credit - Is a stagflationary outcome looming?

The latest growth data coming from Europe and with the continuation of some Emerging Markets woes for the usual suspects such as Turkey many pundits have been pointing out towards a stagflationary outcome. The increasing pressure coming from the trade war narrative which has been prevailing has so far been translating in an increase in PPIs, which could put some pressure on already elevated corporate earnings, no matter how good some recent earnings have been except of course for some darlings of the Tech sector namely the FANG group including our much used Twitter which have been on the receiving end of some nasty price action recently (Facebook was after all a 4 sigma event).

As we indicated in various conversations of ours, in our book, positive correlations always led to larger and larger standard deviations move. 2018 is no exception on the contrary and indicates brewing instability thanks to growing concerns over liquidity. There is now deeper inter-linkages in the macro economy as well as financial markets globally post crisis and given central banks are somewhat trying to extract themselves from the price meddling/setting game, this mark a return at the forefront of "global macro" we think. Rising dispersion and the return of volatility makes active management "fun" again. For instance according to Nomura and as pointed out by Zero Hedge: 

"The collective three-day move in U.S. “Value / Growth” has been the largest since October 2008 - a 4.3 standard deviation event relative to the returns of the past 10 year period." - source Nomura/Zero Hedge

As we pointed out in the past, as per above link, large moves are more frequent in 2018. On this subject we read with interest Morgan Stanley's take in their Cross-Asset Dispatches note from the 22nd of July entitled "Yes, Large Moves Are Happening More Often":

"It's not your imagination. Surprises (large moves relative to expectations) are becoming more common across asset classes.

Defining a 'large move': Large moves matter to the extent that they surprise expectations. We define a 'large move' as a 3-sigma one-day move in price relative to what was implied by options markets at the time across global equities, rates, FX and commodities.

Large moves are becoming more common: 2017 was remarkable. Despite low levels of volatility that made the bar for a large move relatively low, few occurred. 2018 is very different, with more large price swings versus market expectations than any post-crisis year.

A sign that liquidity can be fleeting, even as markets climb: Tightening monetary policy and geopolitical risks may explain part of this uptick. But we think that it is also suggestive of constrained market liquidity, with growing markets supported by the same (limited) dealer balance sheet. This isn't the problem of a single asset class. It's everywhere.

Investment implications: Options markets should at least price in a steeper skew across asset classes and especially so in a less liquid asset class like credit. On a broader note, investors should be cautious about using the low realised volatility environment of 2017 as a parallel for the year ahead." - source Morgan Stanley.

In conjunction to late cycle M&A rising activity, these large standard deviations move are also typical of being in a late cycle we think.

This as well indicated into more details by Morgan Stanley in their interesting note:

"Large moves are becoming more common

2018 has seen a meaningful uptick in large moves relative to option-implied expectations across most asset classes. The contrast with previous years is most pronounced in global equities, which are on pace to see the highest number of such moves since 2008.

However, when aggregated across asset classes, the trend is clear. 'Large moves' are becoming more common in 2018, and are running at the highest rate since 2008.

This result holds at different thresholds. Below, we show the same combined chart over time, but counting the instance of 2 standard deviation moves. It shows a similar recent uptick.

Many explanations, but liquidity looms large

There are many ways to explain the recent uptick in these large moves, especially in hindsight – tightening policy, extreme sentiment towards equities and USD to start the year, trade tension and geopolitical risks. The fact is that volatility has remained generally low in 2018, lowering the hurdle for a large move.

All are likely at work. But the explanation we find most worth discussing is liquidity (or, more accurately, the lack thereof). The fact that constrained liquidity is present across major markets mirrors the broad-based uptick we've seen in outsized moves.

Markets have grown. Dealer capacity has not

It may not feel like it, but financial markets are significantly larger than they were a

decade ago. Consider the following, comparing July 2008 and today:

• S&P 500 market cap: US$11.5 trillion in July 2008. US$24.8 trillion today.
• EUR sovereign bond market: €4.6 trillion in July 2008. €7.5 trillion today.
• USD aggregate bond market: US$10.7 trillion in July 2008. US$20.1 trillion today.
• EM sovereign bond market (this includes EMBI-eligible sovereigns and quasi-sovereigns and excludes private corporates and non-EMBI sovereigns): US$288 billion in July 2008. US$894 billion today.

Yet while markets have grown steadily over the last decade, the means to trade them have not. The last 10 years have seen a historic deleveraging of bank balance sheets globally, a response to the clearly overextended state of balance sheets prior to the crisis.

Credit markets provide one of the most directly measurable, and stark, examples of this. On the left-hand axis of Exhibit 10, we plot the total size of US credit markets, as proxied by the combined size of the Bloomberg Barclays IG and high yield indices. On  the right axis, we plot total dealer holdings of US corporate bonds – a significantly larger market with a lot less inventory on the shelves.

Dealer holdings of corporate bonds have shrunk from 3% of the market to just 0.3% today. While this means that dealers themselves have less to liquidate, their capacity to move risk to a new buyer may be limited and require larger repricing of the asset class in times of stress.

Central bank dominance

As traditional banks pulled back, central banks became significant market players, accumulating quantities of assets over the last 10 years. Central banks hold 28% of the Agency MBS market (the Fed), 22% of the European sovereign market (the ECB), ~10% of the European IG credit market (the ECB again) and ~42% of the JGB market (the BoJ).

As central banks built these positions, liquidity in the affected assets was excellent. It's hard to imagine anything better for liquidity than the presence of a steady, deep, well telegraphed bid. But these forces are now swinging in the other direction. The Fed's purchases have already begun to reverse, the ECB's are likely to over the next six months, and with close to half of its bond market already owned by the BoJ, it will eventually face a constraint." - source Morgan Stanley

On top of that we are seeing weaknesses in global PMIs in conjunction with trade war escalation risk between China and the US. As discussed in our long June conversation aptly called "Mercantilism", liquidity, is indeed a coward. Also, in April this year in our conversation "Dyslipidemia", we pointed out that "credit markets" is one very large area where liquidity has been falling as pointed out as well above by Morgan Stanley's note:

"If you want to play the "bond bears" at some point down the credit cycle road then obviously, you should look at credit markets. As we posited in our previous musing, given the size of the ETF complex in that space and dwindling inventories since the Great Financial Complex, you don't need to be a genius to figure out, that the ETF Fixed Income complex dwarfs the "exit" door.

As a reminder:

This is what we wrote in our November 2017 conversation "The Roots of Coincidence":

If liquidity is a coward, then obviously reducing the illiquid beta part of your portfolio would be a sensible thing to do" - source Macronomics, April 2018

“Liquidity is a backward-looking yardstick. If anything, it’s an indicator of potential risk, because in “liquid” markets traders forego trying to determine an asset’s underlying worth – - they trust, instead, on their supposed ability to exit.” - Roger Lowenstein, author of “When Genius Failed: The Rise and Fall of Long-Term Capital Management.” – “Corzine Forgot Lessons of Long-Term Capital“

This is what we wrote in our November 2017 conversation "The Roots of Coincidence": 

"When it comes to the paranormal phenomena of the low volatility regime instigated by our central bankers, no offense to their narrative" but modern physics still works and normalisation of interest rates should lead to some repricing and a less repressed volatility in conjunction to a fall in the "free put" strike price set up by our central planners in 2018. You probably do not want to hold on too long on "illiquid parts" of your portfolio going forward, given, as many knows, liquidity is indeed a coward.

As we move towards 2018, the big question on everyone's mind should be the sustainability of the low volatility regime which has been feeding the carry trade and the fuel for the beta game" - source Macronomics, November 2017

Sure, performance wise, credit has regained some allure during the month of July with both high beta credit and even CCC high yield and also US Investment Grade and fund outflows for High Grade funds have stabilized. Yet this rebound happens when fundamentals relating to growth on the macro side have been deteriorating. With the U.S. planning to propose a 25% tariff on $200 billion in Chinese imports, in the latest rumors, this could no doubt lead to "Dissymmetry of lift", with a stagflationary outcome, with the US currently pulling ahead but with Europe and the rest of the world facing headwinds.

Markets are less liquid in that context and more fragile than most are anticipating we think. On that subject we read with interest Bank of America Merrill Lynch's take in their European Credit Strategist note from the 25th of July entitled "The economics of fragility":

"Summer carry” often proves to be a misnomer. Over the last few years there has invariably been something that has gone awry between July and August. This year though, so far so good for market calm. Note that US rates vol (MOVE index) and European equity vol (V2X index) are hovering near their start-of-year levels, despite the plethora of macro shocks that 2018 has already witnessed. And there remains plenty on the event risk front that could still emerge given heightened geopolitical tensions, commodity weakness, attacks on central bank independence and a China slowdown.

Trade wars and the unravelling of synchronised growth

Out of all the current macro risks, though, the one that we believe will be the most market moving is trade. As we argued in our last Strategist, an intensification of US-EU trade tensions could drive fears of “Quantitative Failure”. After all, the Eurozone is a large, open, economy and the ECB has – for political reasons – recently announced the end of QE. But conversely, any hint of a simmering in tensions will likely be taken well by investors, in our view. As the chart on the front page shows, uncertainty over global trade policy has now risen to levels last seen in late 1994, which was around the time of NAFTA’s inception. Therefore, much concern regarding trade is already in markets.

For us, the outlook for global trade is supremely important, and the current trade skirmish should not be seen as just another “fly in the ointment” for markets. Trade tensions put at risk one of the big secular themes of the last few years – namely that of global synchronised growth.

Chart 2 shows the distribution of annual GDP changes across OECD countries since 2004. Note that last year was the first time since 2006 that all OECD countries posted positive economic growth rates. The consequence of this was that market volatility fell to unprecedented levels. Economic certainty effectively bred market certainty.

Although global growth is likely to be strong this year – at just under 4% – signs are emerging that the recovery has become less synchronised, a concern echoed by the IMF over the weekend at the G20 Finance Ministers meeting. As a consequence, markets have become more fragile in 2018.

The signs

What are the signs of less synchronised growth? Chart 3, for instance, shows the extent to which US equities have decoupled from EM equities since May this year.

Trade tensions have depressed global growth proxies, such as Emerging Markets. Yet, the US economy continues to be buoyed by Trump’s significant fiscal stimulus (and note the near record EPS surprise stats from the current US earnings season).

In Europe, after the impressive 0.7% quarterly GDP print at the end of last year, growth slipped to 0.4% in the first quarter of 2018. Emerging Market weakness – in particular China – likely explains some of the loss of Europe’s economic momentum lately, especially given Germany’s export focus.

Chart 4 shows the extent to which financial conditions in China have tightened. Looking at Total Social Financing as a percentage of China M2, one can see that the measure has fallen to a record low.

Moreover, with the US powering ahead economically vis-à-vis the rest of the world, and trade tensions rising, the broader EM complex has suffered. Chart 5 shows the performance of a number of EM currencies versus the US Dollar. We compare two periods: the 2013 Taper Tantrum and this year’s trade spat. 

As can be seen, it’s not just those counties with obvious current account imbalances (Turkey, for instance) that have seen worse currency performance this year compared to the Taper Tantrum. Plenty of EM currencies have depreciated more vs. the USD in 2018 than in 2013." - source Bank of America Merrill Lynch

 As we pointed out in our most recent conversations, EM are more exposed to a trade war escalation which would be detrimental to growth. Europe as well has significant exposure to EM through the European banking system. Therefore "Dissymmetry of lift" or to put it another way, a stagflationary outcome is a strong possibility. Sure some pundits would like us to distinguish between cyclical inflation from an inflationary trend. From our perspective, as we have repeated so many times, for a true bear market to materialize you need inflation as the trigger match, regardless if it is cyclical or not. This would lead to additional "repricing" in asset classes.

On the risk for a stagflationary outcome to play out, we took note of Nomura's take in their Economic Perspectives paper from the 27th of July entitled "Bicycles, bumps and brakes":

"Or why stagflation risks are rising

A well-functioning world economy is like a bicycle moving rapidly along a path. The rider represents central banks and governments making adjustments, left and right and via the brakes, to keep the bicycle on a steady path. However, an even greater force keeping the bike upright is the torque created by the spinning wheels, which is analogous to the private sector’s inclination to borrow and spend. As long as the bicycle (i.e., the economy) moves at a sufficient pace – but not too quickly – only small (policy) adjustments are needed to keep it moving steadily forward. Mostly, however, it is the torque (i.e., the private sector) that keeps the bike upright and moving. Problems arise though if the bicycle starts moving downhill too rapidly and, particularly, if bumps then start to appear on the road. If the rider does not know whether there are bumps on the road – and more importantly – whether more of them lie ahead, there is a greater likelihood that the bike will come to a stop, either because the brakes are deliberately applied by the rider or – upon hitting one of these bumps – because it has veered out of control and crashed.

In our view, several bumps have appeared in recent months that are either already destabilising the world economy or, at the very least, threaten to do so in the coming months. That list – perhaps obviously – includes heightened protectionism and the growing threat of a global trade war. However, it also includes a supply-driven rise in oil prices, an unexpected reboot of populist politics in a number of developed and developing economies, growing financial strains from deleveraging pressures in China and a stronger US dollar. In the meantime, our bike (i.e., the world economy) has been heading downhill more quickly, as late-cycle pressures have gathered pace and are now triggering tighter monetary policies from a number of central banks. In short it is time to turn more cautious on the global macro outlook and expect greater volatility. - source Nomura

We like their analogy because it ties up nicely to "v" we mentioned above when it comes to avoiding stalling when encountering "Dissymmetry of lift". With their analogy Nomura is adopting a much more cautious tone going forward:

"It is with that analogy in mind that we are now holding a more cautious view toward the global economic outlook. As we wrote in Darker Clouds, we believe the annual pace of global GDP growth has now peaked (Figure 2) and that a deceleration phase now lies ahead.

The risks to consensus forecasts for global growth moreover are, in our view, now tilted to the downside. Absent major financial imbalances and other overheating pressures, we still think that a recessionary phase for the world economy can be avoided, but a sub-trend growth phase is now much more probable as we head through the next year.

Why is that bicycle analogy of so much relevance to this? With reference to our schematic in Figure 1, it is because several bumps have appeared in recent months that either are already destabilising the world economy or, at the very least, threatening to do so in coming months.

That list – perhaps obviously – includes heightened protectionism and the growing threat of a global trade war. But it also includes a supply-driven rise in oil prices, an unexpected reboot of populist politics in a number of developed and developing economies and growing financial strains from deleveraging pressures in China. In the meantime, our bike (i.e., the world economy) has been heading downhill as late-cycle pressures have gathered pace triggering tighter (or less restrictive) monetary policies from a number of central banks. A stronger US dollar has been one manifestation of these pressures insofar as US Fed tightening has been much more intense relative to the rest of the world. However, a stronger dollar has equally helped apply a brake on other emerging economies that have high USD-denominated debt levels and, by the same token, generated some hard-to-spot bumps in the road ahead.

The protectionist threat

We look at some of these factors in more detail, starting with arguably the most important: protectionism. We think this is important for a number of reasons. Firstly, it appears to already be having some impact on global economic activity. In Figures 5 and 6 below, we look at the recent deceleration of the leading indicators of global growth (manufacturing PMIs) in a number of major economies relative to their respective exposure to global protectionism (proxied by their current account position) in Figure 5 and to their exposure to oil (proxied by oil trade) in Figure 6. The correlation in Figure 5 is admittedly far from perfect but nevertheless suggests that those economies which have relatively high trade surpluses (e.g., Germany and the broader Eurozone) have been hit harder in recent months than those that have trade deficits (e.g., the US).

In other words, greater trade protectionism seems to be exerting some impact on relative growth patterns. This contrasts with high oil prices which, as Figure 6 suggests, do not yet seem to triggering the same (relative) response.

Digging into the details of more recent flash manufacturing PMI surveys (from Markit) leads us to a second reason why greater protectionism is important, namely the supply response and the (relative) inflation impact, which we believe are underappreciated. The details of the latest US manufacturing PMI, for example, revealed that trade frictions have become a major cause of concern, with July showing the steepest rise in prices charged for goods and services yet recorded as firms passed costs – frequently linked to tariffs – onto customers (Figure 7).

The same survey revealed that supply chain delays reached a record high amid rising shortages of key inputs. To put more simply, the US economy seems to have been on the receiving end of a negative supply shock.

Simulations on the Oxford Economics model from a full-blown trade-war scenario between the US and China – shown and described in Figure 9 below – suggest significant damage to the world economy.

Depressed confidence in the US and tighter financial conditions add to supply-side “stagflation” effects already described above and which could – according to the model – lower GDP growth by 0.7 percentage points below baseline in 2019 and by a cumulative 1% by 2020. The hit to China would be even more significant, given its greater dependence on exports with GDP growth some 0.8 percentage points lower than baseline in 2019 and 1.3% by 2020. Since this simulation mostly concerns trade channels between the US and China, the simulated response in Europe is a little weaker, but global supply chain damage and tightening global financial conditions would still lower GDP in the Eurozone by 0.4% points in 2019 and by a cumulative 0.5% points in 2020.

The dollar, China and late cycle US pressures are additional bumps in the road

Aside from greater protectionism – and as discussed above – there are several additional bumps in the road at present that make steering our bicycle (i.e., the world economy) somewhat hazardous. The charts in Figures 10 to 16 below home in specifically on the US dollar, on China and on monetary and fiscal policy issues:

– Firstly on the dollar, we note that its appreciation in recent weeks has triggered a marked tightening in global financial conditions (Figure 10).

This tightening moreover has moved well beyond what would have been implied by the unwinding of quantitative easing policies by the world’s central banks. And insofar as that unwind implies a further tightening of financial market conditions in coming months this suggests more downside for the world economy than those central banks may have imagined based on domestic (cost of capital) considerations alone. As an aside, we note that a stronger US dollar may trigger more downside to global USD-denominated nominal GDP growth – and thus for the revenue streams of multinational companies – in the period ahead as well (Figure 11). A stronger US dollar is also unlikely to help de-escalate trade tensions.

– On China – and related to those issues concerning the US dollar – we note the growing funding strains for companies that have issued offshore USD-denominated debt and the trend toward rising defaults in the corporate sector in recent months (Figures 12 and 13).

As our China economist notes (see The State Council initiates fiscal stimulus), while there has been a greater willingness to pursue more activist fiscal policies and/or allow the RMB to depreciate to mitigate the impact from these pressures, we think that markets are likely to increasingly focus on the sustainability of this policy action and the deleveraging pressures that still lie ahead.
– On monetary policy, we note the late-cycle pressures that are likely to leave some central banks – and the US Fed in particular – with limited, if any, recourse to loosen monetary policy for the time being and with a line of least resistance that points to more restrictive policies (Figure 14).

The complicating factor here – from a global perspective – is the likely waning of fiscal impulses as we head into next year in the Eurozone, UK and many emerging economies (excluding China) relative to the US, where the fiscal impulse will remain relatively strong (Figure 15).

That obviously could continue to pressure US inflation higher compared with elsewhere, not least if we add into the equation aforementioned issues concerning protectionism, oil prices and late-cycle wage pressures. Even in the face of a negative supply shock, with pro-cyclical US fiscal policy a counter-cyclical monetary policy stance would not be unreasonable.

What’s the bottom line?

Our conclusions from this discussion and analysis are as follows:
– Global growth will slow from its current above trend-rate toward a below-trend rate over the next 12- 15 months and probably disappoint consensus forecasts. By definition, the volatility of growth will rise as well from current historically low levels. It would be highly unusual for asset price volatility to remain as low as has been in this environment (Figure 3).
– The US economy will continue to perform relatively well as global growth cools compared with other major economies. That is by virtue of its relatively low exposure to global trade and to higher oil prices as well as a still-solid contribution from fiscal policy. This will leave Fed tightening in vogue (relative to elsewhere) not least when we add in inflation dynamics and the US economy’s cyclical position.
– On that inflation issue, we think the incoming (global) data are more likely to surprise on the upside than the downside in the immediate months ahead. That is a function of several factors, including a delayed response to the world economy’s cyclical upswing in recent quarters alongside the cost pressures that concern higher tariffs and higher oil prices. Ordinarily those cost pressures might be contained for a while if typical late-cycle pressures from firmer capital investment activity and stronger productivity growth came on stream. Given all the bumps on the road that are now triggering angst about the global growth outlook, we question whether this activity will now be strong enough to meaningfully quell those cost pressures.
– A stagflation scenario – the combination of negative growth surprises and positive inflation surprises – would not be constructive for risk assets. That’s particularly if policymakers – in the face of a trade-off between low growth and high inflation – opt to combat rising inflation. In light of positive output gaps, rising core inflation and pro-cyclical US fiscal policy, this might not be unreasonable. This could invoke a tighter policy response, hampering longer-term growth expectations and speed up curve inversion. Natural hedges in this environment include long US inflation break-evens.
– Finally, the metric that perhaps obviously bears watching most closely in the coming weeks is the US dollar. That holds the key, in our view, for how growth, inflation and monetary policy will evolve in the period ahead and by extension for how risk assets will evolve as well." - source Nomura

Now you probably understand better why our "Dissymmetry of lift" analogy is akin to a stagflationary outcome ("v" for "velocity, not speed in our economic case). Sure we are watching as well what the US dollar will be doing in the coming months like anyone else but trade war escalation and rising oil prices would not do a favor in the usually volatile quarter ahead we think. Liquidity is fading thanks to QT with the US pulling ahead for now from the rest of the world.

Overall liquidity is receding and growth apart from the US (for now) is slowing, in conjunction with heightened trade war risks looming. It is therefore not a surprise to see many pundits like ourselves putting forward the risk for a stagflationary outcome. Liquidity for credit markets is a concern, particularly with swelling passive strategies in the ETF complex in recent years when dealers have been retrenching. Our final chart below is illustrative of the risk in credit markets from a "liquidity" perspective.

• Final chart - Coming soon - bids by appointment only...

As per Lowenstein above, liquidity is always backward-looking yardstick. If anything, it’s an indicator of potential risk, it always is. Our final chart is coming from Bank of America Merrill Lynch Situation Room note from the 30th of July entitled "The chicken, not the egg" and shows that Investment Grade dealer inventories appears to be now negative:

"The chicken, not the egg

With the return of excess demand conditions for corporate bonds, we estimate that IG dealer inventories (superior to 1-year) are now negative (about -$240mn) for the first time ever. The only negative inventory number on record in the Fed’s data is for the week ended October 28, 2015, which was most likely an error due to well-known difficulties tracking long maturity bonds (Figure 1).

This is bullish for credit spreads as dealer inventories tend to be leading indicators for prices. While here it is easy to become entangled in a chicken vs. egg discussion, as one could argue that that the causation runs in reverse with low dealer inventories the result of strong markets – and thus tighter spreads – we find strong statistical evidence that inventories lead spreads historically, not the other way around. Low inventories thus add to the bullish case for IG corporate spreads" - source Bank of America Merrill Lynch

It might be the case that indeed as we pointed out in our last conversation that equities might be too high relative to credit. When it comes to global growth and the US versus the rest of the world, we think it is a case of "Dissymmetry of lift" but we ramble again...

"The investor of today does not profit from yesterday's growth." -  Warren Buffett

Stay tuned !