It's always nice to come back from holiday to realise that markets haven't done much in your absence. Economic data in my neck of the woods have been mostly uninteresting. Q2 GDP growth in German was a tad higher than expected, and French unemployment declined to a four-year low in the second quarter. This is encouraging for certain, but these data merely confirm that the cyclical recovery in the Eurozone is alive and well, consistent with virtually unchanged survey data in recent months. In markets, global equity indices have either continued to slowly melt higher or traded sideways in the past two weeks, and U.S. 10-year yields have been locked in a tight range around 1.5%-to-1.6%. In fairness to other markets, I should note that the spot dollar index has declined 2.5%, and that the the oil price has staged a convincing rally. But overall, we have seen no major break-outs in the key asset classes.
Read MoreLet's be clear about a number of key points from the start. Movie characters—especially in action movies like Star Wars—are infinitely less complex than the characters we can create and groom in short stories and novels. This is not because script writers and directors are superficial and simple-minded, but because different rules apply when you're writing a blockbuster movie script [1]. This is even more so when you consider that the writers of this particular script were writing for none other than the Star Wars franchise. No pressure whatsoever!
Read MoreThe melt-up, and break-out, in the U.S. stock market recently is a classic case of the market once again climbing the wall of worry in a convincing fashion. Political and economic uncertainty has surged. Trump is now real contender, the Brexit limbo persists, Italian banks are on the brink, and Turkey is wobbling. But the mighty S&P 500 has no time for such petty headwinds, as low yields press investors to seek returns in the equity market. We have seen this movie before, and it ends badly eventually, but it could go on for a while. This is especially the case if investors are starting to discount that EU politics are about to get really ugly.
Read MoreGlobal economic momentum is modest at best, equities and bonds are overvalued, and while allocating your funds entirely to gold, cash and shorts is enticing, it isn’t possible for the majority of money managers. What are investors to do then? The ranking of creditors and equity in the capital structure suggest that high grade corporate bonds—and sovereigns—is the optimal allocation. When the goings get tough, the equity is wiped out, but as creditor you are at least assured a recovery on your investment; even if it may be a slim one. This time could be different, however.
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