A market strategist sees the 'short of a lifetime' brewing in the German market. Here's the exact scenario he's waiting for before pulling the trigger.

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A market strategist sees the 'short of a lifetime' brewing in the German market. Here's the exact scenario he's waiting for before pulling the trigger.

REUTERS/Hannibal Hanschke

REUTERS/Hannibal Hanschke

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  • Kevin Muir, market strategist at East West Investment Management, thinks that recent price action in the European debt market is "absolutely ridiculous."
  • He also makes a compelling case for a short in the German market that should be applied once the government starts to stimulate the economy through fiscal spending.
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When it comes to the world of negative-yielding sovereign debt, the consensus is still out on how exactly this newly found financial experiment will end.

Some economists think its implementation is necessary in order to spark inflation and growth, while others dismiss the notion as financial alchemy that will surely end in a colossal meltdown.

The allegiance of Kevin Muir - market strategist at East West Investment Management - errs towards the latter half of that argument.

"I kind of look at the European bond market - the German Bund at negative 60 basis-points, or whatever it is - and it's the epitome of a bubble, in that you are guaranteed to lose money on both a real and a nominal basis unless you find a way to sell it to somebody at an even greater negative yield," Muir stated on Behind the Markets, an investing podcast.

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He continued: "This is just absolutely ridiculous that this is what's occurring."

Let's unpack that.

The German 10-year Bund yield is currently -0.67%, which effectively means that if an investor makes a purchase, they're guaranteed to lose money if the security is held to maturity. So the only way to actually have a positive return is to ditch your bond when interest rates plunge further - a notion that is far from guaranteed, and represents tinges of the greater fool theory in real time.

In a world where more than $16 trillion of global sovereign debt trades at a negative rate, German investors are hardly alone. Foreign governments all around the world are issuing debt at negative rates, desperately trying to spur growth and ignite inflation.

Read more: 'It reminds me a lot of the peak in 2000': Legendary investor Rob Arnott compares today's market to the tech bubble - and explains why value stocks are the 'place to be'

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But it's not that simple. Instead of raising prices and prosperity, Muir thinks these central banks have created is a burgeoning bubble.

To him, this is completely irrational behavior - and he thinks that investors are extrapolating the now 38-year old bond bull market much too far into the future. After all, just because the bull has been running for an extended period of time doesn't mean that this trend will continue.

"We had the dot-com bubble in the late 90s, then we had the credit/real-estate market bubble in the mid-2000s, and now I think we're in the sovereign debt bubble of the late 20-10s," he stated.

But what's it going to take to pop the bubble?

In Muir's eyes, the unwinding will begin when these countries finally break away from extreme monetarism, and start spending. Once fiscal spending finally starts to heat up, he's going to short German Bunds like there's no tomorrow.

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His thinking behind the call is simple. Government spending will finally spark the inflationary pressures central banks are so desperately looking for - and inflation is the arch nemesis of fixed income investors. This should cause a massive selloff as investors quickly ditch their negative-yielding issuance with the prospect of higher rates on the horizon.

But until he sees concrete evidence of stimulus starting to pick up, he's not pulling the trigger.

"I've been waiting for the German's to indicate that they're willing to actually spend - and when they do so I believe that the German Bund will be a short of a lifetime," he concluded.

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