I remain of the view that we are in a period of synchronised global GDP growth. This is bullish for equity earnings and will eventually be bearish for bonds once central banks start further tapering of bond purchases to reflect the synchronised global growth we are witnessing.

The big growth engines of the world, namely China, the Eurozone and US are all seeing positive GDP growth revisions. This is very good news and underpins a bullish positioning in global cyclical equities.

It also underpins my core view that interest rates have bottomed for your lifetime. You will never see cash rates and long bond yields lower than what we see today and the only question in my mind is how fast cash rates and bond yields rise in the years ahead.

The Bank of England and Federal Reserve have both started raising cash rates and it’s only a matter of time now before the rest of the central banking world follows. Similarly, the Fed has started reducing the size of its balance sheet and it’s only a matter of time before other central banks follow.

The next central bank to follow will be the ECB, who is maintaining a degree of monetary policy support that is simply not appropriate anymore for the Eurozone economy. Negative cash rates of -0.4% and a huge bond buying programme are now not required in the Eurozone as the region generates economic growth beyond “escape velocity”.

The chart below shows both EU corporate and consumer sentiment readings are at or above pre-crisis highs: The question then becomes why is monetary policy at effectively an “emergency setting”??

Just to remind you how ridiculous the ECB’s “whatever it takes” monetary policy and QE is, below are a few charts that put it in context.

Below, the left-hand slide shows the Fed’s massive QE programme never bought more US Treasuries (blue line) than the US Government was issuing (red line). The US Government effectively refinanced a portion of its debt but the overall stock of available debt was never reduced.

The right-hand slide shows the ECB is currently purchasing seven times more Eurozone bonds than are currently being issued, effectively reducing the availability of stock and leading to a scramble for yield in all forms of Eurozone debt. The influence is absolutely enormous…

What the massive and distorting ECB bond buying programme has done is both local and global in its effect. The chart below shows that EU “junk bonds” now yield less than a US 10-year bond. Yes, EU “JUNK” yields less than the world’s “risk free rate”. That won’t last and both junk and risk free yields will rise when the ECB takes its foot off the accelerator.

The ECB’s distorting actions are artificially holding down all bond yields in the world and in turn holding up the prices of all bond like equities in the world. This massive and highly price distorting QE programme will be wound down in the next 12 months and potentially abandoned after that once there is a change of leadership at the ECB in 12 months’ time back to a German nominee.

The ECB is basically holding back a “dam wall” of rising global yields and that is why I think all investors should be positioning themselves away from bonds and bond like equities before the ECB is forced to retreat with its QE programme.

They are also indirectly holding down US treasury yields and the US economy continues to improve.

Even last night US retail sales again beat expectations. Consumer spending is 70% of US GDP and last night’s better than expected US retail sales will lead to GDP growth upgrades from forecasters. It also ensures the Federal Reserve will again lift the fed funds rate in December by 25bp.

Below I quote directly from Morgan Stanley Research on their take on the US retail sales data and US GDP revisions:

• Headline retail sales were slightly stronger than expected, with sales up 0.2% versus consensus estimate of an unchanged reading and our expectation of a 0.2% fall.
• Within headline retail sales, autos rose 0.8%, holding up better than what was implied by weaker unit sales reported for the month, gas stations fell 1.2% after soaring gas prices boosted September sales, and building materials fell 1.2% following hurricane-related upside.
• Excluding these categories, the core retail control gauge rose 0.4%, slightly above our Retail Sales Tracker’s forecast for a 0.3% gain.
• Nine of thirteen major categories saw increases in retail sales in October. Positive results in the report were seen in motor vehicles & parts (+0.7%), furniture & home furnishing stores (+0.7%), electronics & appliance stores (+0.7%), food & beverage stores (+0.7%), health & personal care stores (+0.8%), clothing & accessory stores (+0.8%), sporting goods, hobby, book & music stores (+1.5%), and miscellaneous store retailers (+0.03%).
• On the weaker side was the non-store retailer’s category, which is largely composed of online retailers and continued its volatile run in recent months, falling 0.3% in October after +0.6%, -0.7% and +2.0% in September, August and July. General merchandise stores also weakened, to 0.0% after 0.3%, although Department Stores within that category rose 0.2% after falling 0.3%.
• Incorporating the stronger-than-expected retail control gauge lifted our 4Q PCE tracking estimate to 3.5% (from 3.3% previously), although weakness in building materials lowered our tracking estimate for residential investment to 4.9% (from 6.0% previously). On net, after raising our forward-looking assumptions for inventories following a weaker-than-expected September business inventories report, we raise our 4Q GDP tracking estimate to 3.5% (from 3.4% previously).

So, we now have US investment banks forecasting US GDP growth of +3.5% driven by crucial consumer spending strength yet a US 10yr bond yield is just 2.32%??? Go figure, that makes absolutely no economic sense.

The only thing anchoring US 10yr yields below the GDP growth rate is the actions of the ECB in Europe, which as I say will be scaled back over the next 12 months.

My view is US 10-year bond yields will rise to the US GDP growth rate of 3.50% in the year ahead. If that proves right, the world equity markets will advance led by cyclical and financial equities, and the biggest downside risk is in bonds and bond-like equities, as I have been warning for some time.

The only thing missing to confirm the world is advancing in a synchronised way is rising bond yields. The only reason they aren’t rising is the actions of the ECB. The bond market is being hugely manipulated and is no longer a guide to anything. In fact, I think the ‘risk free rate’ is, in reality, the riskiest thing on the planet.

My fund is positioned long cyclicals and financials and short bonds and bond like equities. We are positioned for rising bond yields and the only question is how long it takes to play out.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.