Yesterday, a couple of articles went through my Twitter ($TWTR) feed that made me blink. First, Bank of America analysts explained how a bond rout could turn into a bloodbath. People are also starting to worry about bond market liquidity. Other things are happening that macroeconomists are missing in the data they see because of the way the data is collected.
Inflation in Europe is rising more than economists expected, too, causing investors to re-think how smart it is to pay for the privilege of lending to Germany and Belgium. As the region’s yields spike upward, those in the U.S. are following suit.
Notice the chart I posted. It’s not as if we are seeing a transfer of assets from the US treasury market to the stock market, spurring economic growth. People are pulling their money out of the treasury market and putting it in cash.
Combine inflationary pressure with no growth GDP and increasing interest rates and it starts to look like a mini-recession could happen. All I know is the Fed has created a powder keg of cash, and I have never been confident in the ability of the Fed to anticipate and reel it all in before the fuse runs out.
If you are an investor, it’s impossible to time when the market will break. But keep your eyes on the bond market. That’s where the signs of stress will show up first. If you are a startup, cut your burn rate now. If you are going to fundraise, fundraise now. I’d also suggest keeping a realistic valuation and not raising at the absolute highest valuation you can. When the market turns, it’s going to be tougher to hit that valuation for your next round.
UPDATE
Some of my trader friends correctly pointed out that the big banks are covering their asses by planting the liquidity article. Banks never have provided liquidity. They are liquidity takers. The too big to fail NY banks don’t want to face the blame when Humpty falls.
