What if everything you thought was true about markets was a lie? That is the question everyone should be asking today.
It defies logic, but investors (if you can call them that) are now paying over 1% for the privilege of locking their money up in Switzerland government bonds for one year. You read that correctly: paying.
Throughout history, we’ve been told that someone should pay you when you lend them money. Now you’re being asked to pay them. How can that be? Why would anyone do such a thing?
The only rational (if you can call it that) explanation is that investors are so afraid about the prospects for global growth that they’d rather pay to keep their money in a “safe haven” country like Switzerland than risk losing more money elsewhere.
The focus has once again shifted from return on your capital to return of your capital. But unlike 2008, investors are so concerned about the return of their capital that they are even willing to accept losing a portion of it (accepting a negative return).
Perhaps more alarming, investor fears aren’t limited to just the next year. Yields have gone negative in Switzerland as far out as 10 years.
That’s right. For the peace of mind of owning Swiss government bonds, you have to pay 0.2% per year for the next 10 years.
Now, if this backdrop wasn’t incredible enough, here’s where it really gets interesting. Rather than saying this is a troubling development for the global economy, most pundits are saying negative yields are a good thing.
Why? Because, we are told, it means additional central bank easing in the form of even lower rates and even more quantitative easing. And these easing measures (including the upcoming ECB QE), we are told, will continue to lift stock prices. And because we all know by now that short-term stock prices are an accurate representation the economy, the more negative the yields, the better.
I’m being facetious of course as the stock market is only the economy in the minds of central bankers. In the real world of slowing growth, stagnant wages, and a widening wealth gap the stock market is far from the economy. If it were, the economies of Europe and Japan would be booming with stock prices at new highs. Instead, Japan has fallen into its fourth recession since 2008 and Europe is not far behind.
The greatest trick the stock market ever pulled was convincing the world that negative yields are a good thing. How long will people fall for it? As long as stock prices are going up and the illusion of stability remains in place.
“You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.” – Abraham Lincoln
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
CHARLIE BILELLO, CMT
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
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