Markets seem to have gone utterly mad!
Bond yields across the globe are close to zero or negative, suggesting we must be in the deepest of deep recessions. Undeclared global currency wars have broken out as central banks ease rates to try and boost their catatonic economies. European equity markets – supposedly the most benighted economic continent – are booming despite it looking as if the whole European project is about to come off the rails.
It’s a most disconcerting market for a poor old badger to fathom.
What we have are all the unstable and combustible ingredients necessary for a very volatile situation. The market shows a disturbing tendency to believe as many impossible things before breakfast as it can unrealistically handle. So forget about Greeks not bearing interest, the Russians, or even Chinese growth numbers – start to question the fundamentals.
For instance, the logic on European equities goes something like this:
“Well.. wage costs are low, energy costs are low, borrowing costs are a record lows, and the crashing Euro must mean European corporates will be able to export more. That will result in corporate profits soaring and therefore the stock market should rise. And, the US stock market has also risen, and European valuations are far lower. Therefore, European Stocks are a screaming buy.”
(Sound of jingling cash as punter places his chips on 32.)
Such is the power of the market that everyone has jumped into line behind the above kind of thinking.
It actually doesn’t matter that it’s probably nonsense, that European wage costs are low and workers cheap because unreformed labour markets are holding back job creation and wage expansion, that deflation, (triggered by governments destroying the value of money by creating squidzillions of it to buy their own debt), discourages any kind of investment (except the worthless buy-back of own stock to inflate bosses bonuses), or European multiples are so much lower because Europe is so much less likely to see growth. (Try reading that paragraph in one breath!)
It’s a similar situation in the bond market where 40%+ of global government bonds yield less than a rounding error. Yields have got so tight because QE purchases by the US, the BOE, the BOJ and soon the ECB have distorted interest rates to record lows. It’s no surprise there is deflation because aside from parking cash in financial assets and desperately finding higher yielding things to do with investible cash, it’s hardly worth investing in growth.
So bond yields go lower and lower and the growth dynamic slips further into the dreamtime. It will change – probably when hints central banks are set to hike rates triggers the kinds of moves we saw last year during the Taper Tantrum (when the US Fed started to turn off the QE money spigot.)
That’s when things will get really interesting – bond yields rising (which means bond prices fall) and killing passive investor portfolios, while stock markets will take fright from higher rates. As a chum of mine once said: “The market has but one objective: to inflict the maximum amount of pain on the maximum amount of participants.”
And on that happy note – what to buy this week?
Oil – it does feel like we have some kind of bottom. (And in my case, its fat and well ensconced here in Badger’s Holt.)