The Unreal, Real Yield
Inflation expectations in the US are still too low.
There is a big mismatch in US inflation expectations, with 10-year breakeven rates anchored around 2 percent, survey data at 5 percent and core CPI at over 6 percent. We think the latter figures are far more realistic, which means that the US fixed income and equity markets could be in for a nasty shock. We also think that global currency markets are becoming disorderly and that the yen, euro and sterling will all test historic lows against the dollar. It’s not a “sell-everything” strategy, but it is closely related. There may soon be an interesting opportunity in EM Equities and EM Bonds. The last bull market in EM Equities started about three months before the dollar index hit its last high in late 2001 and we see other historical parallels which spark our attention,