It was so hot outside yesterday, I thought I’d been deported.
Not back to Scotland of course. Somewhere sunnier – maybe even a tax haven.
Sure is summer out there. I felt like Lawrence of Arabia as I headed to the Thames for a smoke – was half tempted to buy a pack of Camels.
But it’s not just the paving stones in the City that are nearly glowing under the sun. The bond market is positively baking with heat, as ever more capital is shovelled into its gaping maw.
It’s a grim spectacle; bond investors are relentlessly competing with one another to inflict greater harm upon themselves.
Such is their demand for Swiss debt, that the entire Swiss yield curve is now negative. All new lenders to the Swiss government, be the loan from three months to 50 years, will receive a lower figure upon repayment than they originally lent.
They who would only accept a 48% return on their ten-year loans to the Greek government in 2012, now clamber over one another for a return of less than 2% (a fresh record).
They’re happy to lend money to the Austrian government for 100 years for 1% extra, a century later. Forget that the European Central Bank has a 2% annual inflation target, and a hundred attempts to reach it – any yield is golden.
Peter O’Toole on the set of Lawrence of Arabia (possibly smoking a Camel)
Source: Bloomberg
Long after he’d stabled riding camels in the desert in favour of motorbikes in Blighty, the Arabian Lawrence wrote that “The printing press is the greatest weapon in the armoury of the modern commander.”
He was referring to the use of propaganda in a guerrilla war – like the Arab Revolt he’d proved so capable in. But he may as well have been describing the current market regime. For what is this financial repression of ever lower interest rates, but a guerrilla war on savers in the name of fighting deflation?
The “commanders” may be different, the violence wholly absent. No blood is shed, no lives lost. The casualties are not men.
It is the dreams of the retiree that falls in the line of fire, as pensions struggle to fund their future outflows safely. There’s no income to be found in a zero interest rate world that doesn’t require taking large risk.
It is the ambition of the young to own a home – let alone retire – that takes the flak. Housing near hives of economic activity has soared, now that the cost of borrowing to buy one has approached nil.
It is the strength and dynamism of developed nations that is wounded. Businesses that would have gone bankrupt, and left a void for stronger, more efficient companies, are kept standing, borrowing at little cost to maintain their expenses.
Savers and investors alike, all across the developed world have been deported to this desert of low returns. And as the smoke from the last barrage wafts across the dunes, the artillery is already being primed for the next offensive, and the foot soldiers are eager to recommend new angles of fire.
Take a look at this, written by Blackrock’s global bond chief, which recently appeared in the Financial Times:
More than 10 years after the global financial crisis, the unemployment rate in the US has recovered to reach its lowest level in nearly 50 years. However, such a reduction has not been replicated in Europe, where high jobless figures in Greece (18 per cent), Spain (13.9 per cent), Italy (10.7 per cent) and France (8.8 per cent) and an unhealthy skew in most countries towards youth joblessness are all causes for alarm.
In addition, European companies are losing ground to their American and Chinese counterparts, as torpid domestic growth stifles the desperately needed competitive stimuli of innovation and investment. This shortfall is highlighted by a ranking this year of the world’s largest “unicorns” (private start-ups valued at more than $1bn). Just 15 of the top 250 were eurozone-based, versus more than 175 in the US and China combined.
So far, so good. A decent overview of the Great European Atrophy. Until…
It is therefore time for the European Central Bank to improve private sector growth prospects by expanding its quantitative easing programme to include equity investments in European companies.
… Equity investments should be undertaken in partnership with regional governments and tailored to the states of economic development, growth, inflation and business climate across Europe. In doing so, the ECB could encourage member country governments and key corporations to think and invest long term.
Oh yes, dear reader. As there are so few billion-dollar companies (unicorns) in Europe… the central bank should print money to buy their shares, so that they’re worth a billion dollars on paper. The companies chosen to receive the “unicorn treatment” will be decided by the ECB and the national – sorry, regional – governments in which the businesses are located.
Wait, isn’t that socialism? That should do the trick. Economic stagnation problem solved.
But wait! The FT has more outstanding solutions. This was written by a former International Monetary Fund man, who’s now with Morgan Stanley. Think the negative interest rate shelling in Europe looked bad? A Morgan Stanley banker, formerly serving with the IMF, will have you know that’s what’s really required, is more howitzers:
If the ECB is to make negative rate policy truly effective, it will need to come to grips with both the transmission problem and the flight-to-cash problem. Fortunately, there are solutions…
On the transmission problem, the ECB could shield small depositors from negative rates. For example, the ECB could ensure that, say, the first €5,000 of each depositor’s account is guaranteed a minimum deposit rate of zero…
Such a policy can make negative rates more politically acceptable by protecting regular households, while limiting the negative impact on bank profitability…
On the flight-to-cash risk, cash holding can be made costly. Specifically, the ECB could impose a transaction fee — equivalent to a negative interest rate — whenever a bank approaches it to obtain currency. Banks routinely turn to the ECB for currency when customers make unexpectedly large cash withdrawals at a branch or an ATM. Citing the fee, banks should be able to pass the cost on to the public.
How “fortunate” we are, that such “solutions” exist. What could anybody in the eurozone have to complain about? Their deposits in the bank above €5k lose money… and when they try to withdraw their cash, they lose money again! Fantastic.
But do not think that we’re exempt from such “solutions” here in the UK. Brexit’s devaluation of the pound has shielded us from the Bank of England’s artillery for a time – Commander Carney didn’t need to fire on deflation, as the FX market was already doing it for him.
But the reprieve won’t last long – the commander is already talking about a new offensive on interest rates, a “near term policy response as insurance to maintain the [economic] expansion.” And rates are still only 0.75% in the UK, so the generals on Threadneedle street will start to get creative with “unconventional” solutions…
This guerrilla war being waged by the central bank “commanders” is turning the investment landscape into a desert of low returns, where sanctuary can only be reached by taking risks.
Shrewd investors must learn to ignore the mirages and bear the heat, before traversing the dunes to the few remaining oases. Those that saddle their camel with gold will go far.
Wishing you a good weekend,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates