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OK, this is going to be a long one and it’s sure to p*ss off a great many folks, so without further ado – let’s do it! Make sure you hang on! It’s going to be a bumpy ride.
This morning we got a stupid “just-get-me-into fixed-income” rally. Bond desks look like Black Friday at Best Buy. The US long bond future is up 2 handles. The German 10-year bund is ticking at all-time low yields of minus 65 basis points.
Now the bond bulls will say this was preordained and easy-to-call. Maybe. And just for the record, I hold no grudge against them. They nailed it and this has been a rally for the record books. Look at gilts. They have now beaten equities for total return since BB:
And I know that US fixed-income is still in nominally positive levels, but I firmly believe much of this rally is emanating out of Europe. European monetary policy is Tom-Cruise-Crazy. No other way to describe it.
Let’s stop and think about the logic of the policy the Europeans are pursuing. Their economies are lacking end-demand. The private sector refuses to spend. So what does the ECB do? They lower rates to negative levels. TRYING TO FORCE THE PRIVATE SECTOR TO SPEND.
Ask yourself something – if negative 40 bps wasn’t enough to cause a European to borrow money, do you really think minus 60 bps will be the move that changes their behaviour? Of course not! It’s absolutely insane that Europe continues down this road.
Investors are rightfully realizing that: a) more monetary stimulus combined with b) fiscal austerity equals moribund growth with flat yield curves stuck at zero.
I am by no means a Paul Krugman we-can-dig-ditches-and-fill-them-back-up Keynesian. I am a firm believer in the broken window fallacy.
Yet the idea governments shouldn’t spend money to INVEST in infrastructure and their people when there is a clear lack of end-demand is bonkers. Germany is running a 1.5% of GDP surplus. Their entire yield curve is negative. Their economy has clearly rolled over.
Yet the German government REFUSES to SPEND. It’s a friggin’ gong show over there. If they aren’t going to spend with rates this negative, when ARE THEY GOING TO SPEND?
The German government is GETTING PAID TO SPEND. And yet they still think they can’t add any value by investing in their economy? So what do they suggest? Even more negative rates.
If minus 60 bps doesn’t work, then why not negative 200 bps? How about 400 bps? Just keep lowering rates until it works. The beatings will continue until moral improves.
The Federal Reserve has recently explored how negative rates might have helped during the last crisis. And Ken Rogoff has abandoned predicting the end of the world from too much debt and now advocates for ways to implement negative rates.
All of these carpenters wandering around looking for nails to hit when really what we need is a plumber who understands how the modern economy works. MONETARY POLICY IS INEFFECTIVE. The sooner we understand that, the better.
If we continue to rely on Central Banks to save us, they are going to break the financial system. Sure, it would be good if the Fed lowered rates. But that’s not the real problem. The real problem is an over-reliance on monetary policy.
I understand why an investor would buy US Treasuries. The financial system is unstable, and buying the world reserve asset is a prudent move. Yet buying any duration is an assumption that the world will continue with this over-reliance on monetary policy.
If you believe that governments will continue to follow the advice of the EU and Ken Rogoff’s of the world, then buying fixed-income is a great trade. But if you are worried about this changing, if you think that governments will realize the absurdity of lowering rates to extreme levels and instead choose to invest in their countries, then this rush into fixed-income will prove ill-timed.
Yet so far, I am wrong. Monetary stupidity reigns.