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Out of the Box: The Game is Rigged

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You could say that the “Game” has always been rigged, due to government intervention, and the actions of the central banks. That would not be my opinion though, as their actions were so much less influential than they are now. I would say that up until the 2008/2009 financial crisis that the “Game” was “influenced.” It is a matter of degree, of course, but I believe I can substantiate my opinion based upon the facts.

First, the world has never seen negative yielding bonds before. This would be as in “Never!” They make no sense, they are an overthrow of thousands of years of history, and they have been forced upon us by the actions of the central banks which have driven lenders to pay the borrowers for the “privilege” of shelling out their money. No one, in their right minds, would have ever though this could happen. So, let me tell you what I think, there are $13 trillion in negative yielding bonds now and I think we are headed for $25 trillion, $50 trillion, $100 trillion, and maybe far more.

“Some stories have to be written because no one would believe the absurdity of it all.”
-Shannon L. Alder

However, this is where most people stop, at the central banks, and they have not gone far enough in their thinking. All of the central banks of the world are owned, and mostly controlled, by the governments they represent. The Fed’s vaulted “Independence” is correct, and a tribute to the United States, but I can assure you that the European Central Bank, the Bank of Switzerland, the Bank of Japan and the People’s Bank of China have no such “Independence.” They are owned and “managed,” by the governments they serve.

Consequently, when you see “negative yielding bonds,” in these countries, you need the correct focus. It is the “Governments,” not the central banks, that are mandating yields lower than Zero, to protect their own interests. This is because, in my estimation, that the various governments cannot afford their budgets, their social programs, or any kind of increase in taxes, and so they have learned from the “Great Recession,” and found a very convenient way to “Rig the Game” for their own benefit. The central bank in the United States is one thing but the central banks in Europe, Switzerland and Japan are nothing but a shill for their governments.

“Certainly, the game is rigged. Don’t let that stop you; if you don’t bet you can’t win.”
-Robert A. Heinlein

You can shake your heads, scream, point your fingers, or wail, but it won’t make any difference. You cannot even come close to winning, when the people making and controlling the money are playing against you, which they are now. Get this through your heads.

If you miss this point you will lose money.

There are some positives here, however, which can be taken advantage of, as this “Force Majeure” continues. Everyone on Wall Street always asks about “The End,” and I am telling you that there is no end in sight for years, if not decades, if ever. So, I would not be concentrating on some timeline, that is nowhere in sight. The positives, of our present environment, are that borrowing costs, all over the world, including the United States, are going to go lower and lower and lower. This means that the cost of our Federal debt, which is the size of the debt times the interest rate paid for it, is going to go lower, which will help the country, as it is helping all of the other countries on the planet.

This will also help corporate borrowing, individual borrowing, mortgage rates, student loan debt, anything tied to LIBOR and Corporate Bonds and High Yield Bonds and the re-financing of anything. Consequently, corporate profits will be enhanced, past what many now predict, because their cost of doing business is coming down, because interest rates are coming down, and will stay down, if not go to absurd levels, such as in Europe and Japan. This will also be a boon for equities, Real Estate, and anything that will appreciate from lower interest rates. The BIG problem, however, is what this is going to do to insurance companies, retirees, savers, pension funds and anyone, or any institution, that is dependent upon yields, and cash flows, for their sustenance, if not their survival.

Basically, if you are borrowing, it is “Manna from Heaven,” and if you are trying to get some yield, it is the “Wrath of God.” That is the cycle that I think we have entered. Then with the ECB making noises about another round of Quantitative Easing, and the Swiss central bank continuing on, and the Bank of Japan continuing on, the Fed is going to get “Forced” to follow suit. A quarter of a point cut here and a quarter of a point cut there and soon, very soon, the United States central bank will be forced to compete with the world’s other central banks because there will just be no choice, as America defends her position.

“Think it over. Think it under.”
-Winnie the Pooh

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities.
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