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Market dislocation

I’ve wondered for a while why none core (and some core) European bond markets have sold off and equities haven’t. I guess equities are playing catch up today. And the only safe havens are Bunds, Gilts and Swedish treasuries (2.02% on the 30 year last week)… and US Treasuries.

The super committee fails to agree a deal on budget cuts and Moody’s is a bit moody on US AAA-rating… so US treasuries rally… really? Oh US treasuries are now so much safer… Right!

It is a safe haven, so if even US treasuries are deemed unsafe then things are really bad, so we better run to the safest of the unsafe assets – treasuries. Completely logical. After all the market did the same when S&P downgraded US a few months back. Perhaps US treasuries aren’t the safest anymore. Just a thought.
Fundamentally, equities are around fair value, pricing in 15% or so of earnings downgrades for 2012 in Europe, but we’ll always undershoot. The bonds listed above on the other hand look very overvalued and French, Spanish and Italian debt must be a good bet at some point. Merkel won’t let the Euro and the EU go.
However, we don’t trade on fundamentals anymore. They removed the fundamentals class from the investment banks’ graduate training program curriculum’s a long time ago. Bond markets are a complete mess and equity investors don’t dare to stand up to big brother. So we sell risk capital, the asset we need more of, and buy debt, the asset that got us into this mess in the first place. Until you can stay liquid longer than the markets can stay irrational all you can do is to play along. It makes sense and you know it!

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