We've mentioned more than once the diversion meme. It appears such has now become the dangerous consensus. Here's a quote from Marc to Market.
This divergence theme that we have been writing about for more than six months has now become the consensus. Consensus views are often wrong. We look at ways the consensus can be wrong about the divergence. There are three basis ways the divergence consensus can be wrong: The US disappoints. The eurozone surprises to the upside. Investors are too pessimistic on Abenomics. If everyone agrees, what could go wrong?
This is not to suggest that the consensus view will miss the mark this time. It's just to raise a caution flag that all investors should have when lots of folks are lining up on one side of the economic vessel. Last year's bond market performance is an example that ought to be fresh in most investors' minds.
There's much liquidity splashing around out there and it looks as if more is on the way. Adding to that liquidity pool is cheap oil prices. Just last week Japanese 10-year government bond yields slipped to their lowest-ever level, 0.31%, as buyers were willing to accept just three yen of interest for every 1,000 yen invested.
Yields on shorter dated bonds were even lower as government officials show how desperate they are to create some inflation. The two year bond auctions there last week for the first time had investors accepting negative yields, in other words, paying the government to take their money.
Some of us here in the U.S. believe we've been doing just that for a long time.
The two-year bonds were yielding minus 0.003%, doesn't sound like a way anyone is going to get wealthier anytime soon with Japanese core inflation running at 0.7%. Japan's government debt by some estimates is twice the size of the economy and Moody's recently down graded the country's credit rating, causing a brief blip in inflation that was shorter than some Hollywood celebrity marriages.
The whole globe appears to be crying out for some inflation. There's plenty of it out there, but it depends on who and how they get to measure it.
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