“Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffett
Earlier this month, the US 10-year bond reached a yield of 3.2%, the highest since 2011. As inflation in the United States picks up, the economy grows well above consensus estimates and unemployment falls to the lowest level of the last fifty years, it is only normal that the Federal Reserve rate hikes are confirmed.
Those concerned about a “hawkish” tone of the Federal Reserve and the path of normalization, should admit the reality. Many investors were aggressively betting on the Fed not doing what it had announced it would do for two years. Too many times have I heard people say that “the Fed will not dare” while increasing exposure to negative-yield bonds and emerging market risk.
The first, and most important factor is that the Federal Reserve is not hawkish or aggressive:
That implies that the Federal Reserve will maintain its path of rate hikes as it has been announced over and over again for the past two years. Those who decided to ignore it did it at their own peril and cannot expect the Fed to bail them out of wrong debt or investment decisions.
If the Federal Reserve does not advance in its normalization path, it will have no tools for the next change of cycle, making the next crisis much harder and deeper than any of us can imagine.
What is the problem, then? A market that has been ignoring the warning signs expecting that the Federal Reserve will not do what it has announced and that the US economy would not strengthen. A kind of global “Too Big To Fail” has driven more than 70 countries around the world to increase their fiscal imbalances and borrow at historical high amounts thinking that, by doing so, the Federal Reserve would not dare to raise rates and would maintain the bond bubble.
