“Davidson” submits:
Q2 hedge fund letters, conference, scoops etc
Rates are like anything else in markets. They are set by market psychology. Central banks think they control rates but they do not. Rates everywhere are set by investor shifts of capital as they seek the best rates of return vs. each investor’s perception of risk/reward. Becoming increasingly global, capital now carries increasing perceptions of Emerging Market investors who have traditional experience with fixed income and real estate but much less with equity. As the options to capital flow have widened, Emerging Market capital has sought out Western financial systems with our better property protections and greater currency stability relative to that of Emerging Markets. Emerging Market currencies have a history of debasement through corruption and autocratic leadership which makes investments US$ and Euro based assets nicely profitable for Emerging Market investors. Such shifts, which strengthened the past 20yrs, come at the expense of traditional Western return expectations.
Central Banks have always followed rates not led them. With Emerging Market capital flooding fixed income Sovereign Debt, Western investor perceptions of Central Banks leading rates has left them in a quandary as to why Central Bankers have kept rates so low. Nowhere is it recognized that changed global capital flows are responsible for today’s low rates. In Western markets it is the traditional yield curve as a signal of market recessions and tops now incorporated into trading algorithms which have caused multiple periods of recession panic. No one has recognized that markets always differ from the past. This time Emerging Market capital, whose influence has gradually risen, is the primary input to lower Sovereign Debt rates and higher real estate prices.
Emerging Market capital is low cost primarily because safety of capital is more important than return on capital . As the US pursues lower global tariffs, capital will have greater opportunity for returns in the US as a producer/exporter. Capital should continue to flow to the US and keep rates low for some time.
Much of the current advice is to invest in Emerging Markets. But, the impact of current US policies on global capital allocation favor long-term US growth!!
