Janet Yellen just broke up with you

Angus Coote

Jamieson Coote Bonds

When we look back upon the financial excess prior to the GFC, the great bust and near financial Armageddon, the multiple bouts of global quantitative easing transferring private debt to governments thereafter, it will make a historic story for the grandchildren. Boom to bust to boom again within a decade, with reckless investors in the most part being saved by governments who facilitated in privatising the gains and socialising the losses.


If you think the U.S. Federal Reserve still has your back, Mr and Mrs Investor, the way they had your back in 2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016…well, you may be mistaken. I think Janet Yellen just broke up with you ~ B. Hunt, Salient Partners.


Since the GFC, global central banks have provided a substantial tail wind for markets. June 2017 may well be a significant turning point for investors. If you take central banks at their word, they just packed their bags and walked out, not to return. Investors are on their own, albeit, at some of the highest asset valuations in recorded history. If ever there was a time for regret minimisation as an investor, now must be close.


European elections and political risks have passed, global data remains decent and markets remain calm, giving global central banks the confidence to begin removing the extraordinary stimulus of the post GFC era. The central banks of the U.S., Europe, Norway, U.K., and Canada are all openly discussing the removal of policy accommodation. Whatever form that may take (raising short dated funding rates, not reinvesting maturing bonds, reducing bond purchases) the net result is a contraction of financial market liquidity and increasing the global cost of capital. Both of these measures are in stark contrast to the investment environment enjoyed since 2008.


The implications for investors after the extraordinary post crisis period should be profound. For a decade, a “buy any dip” and fade “volatility” was amply rewarded by markets with an ever lower cost of capital and excess liquidity. This low volatility environment will likely give way to market based price discovery, rather than central bank controlled markets via asset purchasing programs, and some asset classes should suffer badly under reduced liquidity.


This is due to the “pricing cycle” effect in asset markets. Prices tend to go “up the staircase and down the fire pole”. Bull markets grind higher, gaining ground in small incremental moves. Investors remain optimistic and owning assets feels virtuous as income and capital gains make for healthy portfolio returns. Bear markets tend to be chaotic, as leveraged sellers are stopped out and forced to chase pricing lower, leading to a death spiral of lower pricing and reduced confidence until value is ultimately restored which encourages new buyers.


Huge global debt burdens suggest this time will likely follow most historical cycles, with similar transmissions from monetary policy through to investment markets.

Angus Coote
Angus Coote
Jamieson Coote Bonds

Angus established Jamieson Coote Bonds with Charlie Jamieson in 2014. He started his career with JPMorgan in London, before working at ANZ and Westpac, where he transacted the first ever Australian Bond trades for several large Asian Central Banks.


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