The old expression is when the tide goes out, you get to see who’s swimming naked. In financial markets, the tide is going out when central banks are raising interest rates and growth is slowing. That is to say, right now.
“WorldCom, Enron, Bear Stearns, Lehman’s, accounting irregularities etc. have all occurred when the cycle is slowing and the Fed is raising rates,” says Khuram Chaudhry, a European equity quantitative strategist at JPMorgan in London. “The probability of an ‘accident’ is very high right now, than at any time over the recent past.” Chaudhry says JPMorgan’s own quant macro index suggests bond returns are likely to get a bid very soon, as it’s edging further into contraction territory. Inflation expectations are high, but inflation has peaked, he says. If history is a guide to where we are today, then bond yields should soon peak and start to move significantly lower, the Fed’s target rate will peak sooner than the market is currently forecasting, and equities will remain volatile even through the first part of the next interest-rate easing cycle. More than that, bond yields peak when the yield curve inverts. “During June/July …