t is truly surreal to continue living in a financial world where we have depression era interest rates, constant record highs in US shares, alongside European Junk Bonds paying less yield than a 2 year US treasury note.
Let’s not forget the whole negative interest rate thing. Not in 5000 years has “the world” experienced such a scenario of negative interest rates. We really do live in interesting times.
To help with this note, we were fortunate enough to listen to a fantastic interview with Jim Grant on an Adventures in Finance Podcast.
One of his main themes is the real effect artificially low interest rates has on ALL financial markets and what a more sensible system may look like.
Jim’s multiple books, twice monthly interest rate observer publication and overall legendary economic intelligence has led to many calling for him to put his hand up for the next US Fed chair position! He was asked by Grant Williams in the podcast what his response might be if actually asked to “step up”… his answer was an immediate “NO”.
The reason? “Why would I want to take the fall for the poor central bank decisions of the past”. He goes on to say there is room in this world for a better monetary system but not before a major market comeuppance.
With a preamble that the sun will go up and come down, he continues by saying that prices convey very important information and interest rates are a price. Jim postulates prices are now conveying misinformation after 8 years of “suppressed interest rates” and the problems of this unnatural mispricing will come home to roost.
Furthermore, he notes, Mario Drahgi is fond of saying there is no bond bubble and responds with, “Of course there is a bond bubble”! Why would European Junk Bonds trade through US 2 year Treasuries Bonds if not for the 60billion Euro per month help of the European Central Bank”.
Jim goes on to say that these types of distortions are arbitrated through all markets of the world.
Does he mean that without this help markets would revert to natural pricing? You bet!
This means Australia too. Thanks to Grant Williams http://ttmygh.com for this chart below. Such a chart would not exist if not for the distortion of the price of money by “desperate to hold the system together” omnipotent central bankers…….(and China!!??)
Did you get that? International “stuff” does and will matter to this “lucky country”!
But it’d be unaussie to worry about something that is not happening now! Right now, there’s no inflation and rates are not rising… until they do.
The above chart of Australia’s mortgage debt to GDP illustrates problems that exist throughout the system. How will investors pay for a 2 or 3% rise in rates with this much debt? Many would be bust. Government to the rescue?? They’ll try.
As an investor, this is a risk best avoiding, painful as it can be waiting.
Back to Jim Grant, why should he consider a Fed Chairmanship with this type of risk legacy unfolding on his watch (does this explain why they ended up with grandma Yellen??)
He did say he might consider the US Fed chair position when some of the smoke has blown away and then work on the recreation of a more natural system, as this one is sure as the sun comes up and goes down, will blow up. Works until it doesn’t.
A new place where central banks are not buying all mortgages, government debt and equities through straight up money printing.
A market where the market determines interest rates and the USD is not an instrument of national policy but a measure of value.
A marriage of digital tech and bullion for example? Who knows. The need to stabilise the dollar in harmony with other currencies?
The most important take away, for us, is the amazing thesis of returning responsibility for financial institutions to the owners of those institutions.
Getting out of the business of governments subsidizing the owners of leveraged financial institutions. Like, when said institutions became impaired or insolvent, the owners, stock and bond holders actually take a loss, not the government/public!! Novel idea, eh?
Like the responsibility for profit and error??
Like naturalizing and normalising interest rates? Back to capitalism instead of state control?
Unfortunately, the greatest chance of long term reform of this demise is, to quote Jim Grant, “a clarifying and conscious raising bear market”.
The pointing to the inevitable event where Central Banks will lose control over a situation which they have created.
Like, imagine if the market pulls back by 20% (unthinkable as it is). What will be the response? More of the same? The last time markets pulled back meaningfully was in 2015, the US Fed immediately started talking about going to negative yields, like Japan and Europe and that’s when investors realised they could go “all in” there is no risk.
It’s obvious what central banks will do if this happens again, the question one should ask is what happens if their response doesn’t work. Rework the system? As they should have done many years ago.
The fed has been discussing normalisation since 2011. What a joke. They’ll be like firefighters coming to investigate their own fire when the fireworks start.
In the meantime, Debt to invest sounds especially normal if you’re an Aussie property guy/gal/other or US stock investor.
Love this chart, no bubble here!
Irrelevant?? Let rates raise and find out!!
Cant stop looking at this one.
Greed? Never been larger in US stocks? Don’t think this doesn’t matter to all investors!
We love this chart too, as it does not include Pension, Health, Defence or derivative commitments. All to be met with newly printed.
The greatest debate, as usual for investors, should be the inflation v deflation, both have an incredible effect on your investments.
We look forward to assisting you through this maze.
Whichever way you look, more money printing or system reset!
Luck will favour the prepared.