Out of the Box: The Theme Park

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Nope, this is no attestation about Disney. This has nothing to do with any park, though sometimes it can be amusing. This is a very macro comment about how the markets are lining up these days.

We are currently being driven by themes, in a manner that is relatively new. For quite a while it was all about the “trade wars” with China. Of course, that view is far too narrow because it is really all about our “Game of Thrones” with China, as each nation waved its ruffled feathers, and contended dominance.

Now we are being run by the “Coronavirus.” Strange to have the markets run by a virus, at first thought, though the Bubonic Plague ran the world for quite a while, as it made its way across Europe. Each day now it seems the numbers are up, or the numbers are down, and both the bond and equity markets react accordingly. It is the Theme of the day.

However, the real drivers of the markets, behind the scenes, and largely overlooked, are the central banks. We pay attention to them, we try to translate the “Fedspeak” and we are quite well aware that the Fed is “independent” while the rest of the world’s central banks report directly to their respective governments, with no independence at all.

Here we have, arguably, the most powerful, and unelected, people in the world who can make “Pixie Dust” money from nothing but thin air with a wink, blink, and nod of their heads. They are also the only people in the world that can’t be charged with counterfeiting, as their governments direct them to expand their balance sheets and lower debt levels to virtually unimaginable levels, by buying their bonds. We hit $17 trillion in negatively yielding debt, got down to $11 trillion, and are just shy of $14 trillion of the stuff currently.

To make my case, as Perry Mason would have said, let me start with the United States. We have the biggest economy in the world, at $22 trillion, with China at number two, with $13 trillion. We have, by most estimations, the strongest economy, currently, and we certainly have the most liquid bond market. You would think, therefore, that we would likely have the lowest, or close to the lowest, interest rates in the world, but we aren’t even in the ballpark.

Not even in the bleachers.

You can say that it is the economy. You may well, with some truth, point your fingers at the Fed. However, whatever the reason you believe, the other nations of the world are eating our lunch and costing the American taxpayers a great deal of money, in the process.

NATION 10 YEAR YIELD
United States 1.63%
Canada 1.39%
UK 0.61%
France -0.14%
Germany -0.38%
Italy 0.91%
Netherlands -0.29%
Switzerland -0.70%
Greece 0.94%
Japan -0.05%

*Data according to Bloomberg

Take a look at this data carefully. With no disrespect to Greece, their 10 year sovereign yield is some 43% lower than the American 10 year Treasury yield. It just makes no economic sense but there you are, as reality smacks you across the face. It means that their government can borrow money, to pay for their national budget and social programs, far cheaper than what we can do in America. It also means, as you may have regarded recently, that the Dollar is edging up and up and UP, against the other major currencies which is also a decided negative for the United States.

We are, in fact, in my opinion, being “sucker punched” by many of the other nations of the world and, I believe, that at some point, the Fed has to react, to protect American interests. Chairman Powell recently testified before Congress. No mention was made of any of this almost as if America is a stand-alone country, and not connected to the other nations of the world. That is just not a correct thesis.

There are a number of people at the Fed that get my commentary. To you, I say, “Ladies and gentleman, something must be done here, because we are being taken advantage of by the nations in Europe, Japan and the rest of them.” I ask, “Why does America have to pay more to borrow money than Greece and Italy, while Germany pays 201 basis points less that the United States to fund their government.”

We are getting duped. Let’s stand up and fight back!

“It’s not whether you get knocked down, it’s whether you get up.”

-Vince Lombardi

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc. & B. Riley Wealth Management
[email protected]
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. Redistribution/reproduction of this material is prohibited. See additional disclosures at: http://brileyfbr.com/legal/legal_disclosures

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