The Unfolding Spectacle.
The iPhone of AI.
We have been railing against faulty forecasting models and central bank complacency for quite some time, possibly to the annoyance of some readers. When hedge fund managers do the same, they do not merely express a policy disagreement. They exploit an arbitrage opportunity. By building up massive short positions in US treasuries, they are essentially placing a bet that the Fed and other central banks won't deliver on their inflation targets. The counterparty to these trades are traditional asset managers, like pension funds and insurance companies, who are long sovereign debt. If the hedge funds are right, you better watch this unfolding spectacle from a safe distance. That would be a financial crisis like no other. And there is not going to be a bailout at the end of it. The bailouts got us into this. They came at the beginning.
A European central banker told us in a private conversation some time ago that the worst possible case is for exactly this to happen, that markets lose confidence in the inflation targets. We are two years into an inflation shock that shows no sign of disappearing, and this is now starting to happen. The hedge funds are not the market. But the short positions against bonds, and also equities, are remarkable. We are not amongst those who consistently warn about financial crises and market meltdowns. We happily leave that game to others. But we can see clearly that a financial crisis in US treasuries would rock the foundation of the global economy. This is not just about inter-linkages between financial institutions. The global economy is dependent on dollars and treasuries. (Source: eurointelligence.com)
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