Out of the Box: A Radical Alteration
I have been on the verge of writing this commentary for quite some time. The more that I thought it through though, the more complicated it seemed to become, and the more I felt like there were loose ends to my reasoning. I did not wish to leave any loose ends dangling here, like some “hanging chads” in Florida. So, I held off.
None of us were around, of course, for the Great Depression of 1929. Aside from two World Wars, it was probably the most significant event of the last century. Since then, in my forty-five years on Wall Street, I have seen, and lived through, a number of Recessions but none like the Great Recession of 2008/2009. I do not comment here on its severity, but on the way it has radically altered the world’s economies and markets, all of the economies and markets.
I point to several items to begin to make my case:
|Country||5 Year Yield|
*Data according to Bloomberg
You will note here that the largest economy on Earth, with the biggest bond market, and the Currency Reserve country, has a yield higher than all of the countries noted. You all also note that even troubled Greece, said with no disrespect, has a sovereign yield lower than the corresponding U.S. Treasury.
Also, please make note of the negative yields in some countries. As of last Friday, there were $10.4 trillion bonds that had negative yields. It is almost inconceivable that negative yielding debt is possible and yet there it is, and trillions of Dollars of it. The notion, before the 2008/2009 debacle, would not have been believed by anyone and yet, we have arrived here and all because of the ramifications of the intervention of the world’s central banks at that time.
Now the central banks are the “lenders of last resort” and that is nothing new. What is “totally new” though is that the central banks entered, and never left. Ten years later, they are still here and still dominating and controlling all of the markets with the money they created out of thin air and then parceled out, in various manners, to the marketplace.
What is clear to me is that the central bank bail-out also became quite convenient for all of the nations on Earth, including the United States. Lower interest rates mean less taxes, more social programs, growing economies, higher stock prices, and a lower cost of issuing national debt. The Alchemists dream has been realized, as the lead has been turned into gold.
You may think that it is the “Land of Make Believe” but I am here to tell you that you better believe it, and get used to it, because the central banks will not be changing their behavior any day for the rest of your life, in my estimation. The central banks now, it can be justly said, totally manage the global markets in a manner which no one has ever seen before.
To put it another way, before 2008/2009 they were “part of the Game.” Now, they “are the Game” and no institution on Earth has the financial capacity to compete with them. There are the central banks and then there is a gap, the size of the Pacific Ocean, that separates them from everyone else. It is a small handful of people, at the direction of their governments, which now controls every market on Earth.
What this also means is that we will not be seeing significantly higher interest rates for any time into the long future. Sure, we will see certain credits that get into trouble. Yes, we will see upgrades and downgrades by the ratings agencies. However, it is going to be lower interest rates, for every class of bonds generically, and higher stock market prices as a result of this. The outlier here is if someone blows up their currency but even then, the central banks might step-in and buoy someone’s currency, if it becomes necessary.
We have entered Alice’s Wonderland and I proclaim my opinion that we will not be heading back up the rabbit hole for decades, if ever. That is correct, “IF EVER.” That is what I think.
When logic and proportion
Have fallen sloppy dead
And the White Knight is talking backwards
And the Red Queen’s off with her head
Remember what the Dormouse said
Feed your head
Feed your head
– Jefferson Airplane
Mark J. Grant
Chief Global Strategist, Fixed Income
B. Riley FBR Inc.
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