7/12/2019 Weekly Update: Summer Bummer
by Zach Marsh on Jul 12, 2019
Weekly Update: Summer Bummer
Maybe it’s a sign I’m getting old, some things I just don’t understand. Now, when I say I don’t understand these things, I mean the entire concept seems completely foreign to me—a bizarro world of sorts. For instance, I’ll never understand why my kids watch Youtube videos of other people playing video games. Mind you, it’s not what you think, they aren’t watching the video to learn how to play the game, they’re watching the video for entertainment. In fact, my youngest son’s favorite “Youtuber,” who’s screen name is Dan TDM, earned roughly $18.5 million in 2018 by simply playing a video game, Minecraft, on Youtube while adding his own commentary. So, yeah, I guess I’m out of touch.
I felt further out of touch this week when I read that, in the Eurozone, there are 14 corporate bonds, with ratings below investment grade, aka “junk bonds”, which have yields below zero. Let me add some understanding to that statement, a negative yield means that, should you hold the bond until maturity, after receiving all interest payments, your best possible outcome is to lose money. Now, that guaranteed loss at maturity, by the way, is the best outcome; the worst outcome is that you would lose your entire investment. So, risk everything to only lose a small amount—sounds reasonable. How does that happen, you ask? As part of the European Central Bank version of Quantitative Easing they have engaged in, not just purchasing various European government bonds, but bonds of various companies across the Eurozone.
Central bank interference over the past 10 years has not been limited to Europe—we have seen similar policies enacted in Japan, Switzerland, China, and yes, the United States. The distortion illustrated with negative yielding junk bonds sheds light on the distortions lurking beneath the surface across all asset classes—not just in Europe, but all over the world. Monetary policy and actions may not have fueled inflation among consumer goods and services in worldwide economies, but it certainly has among investible assets. Currently, worldwide, $12 trillion worth of bonds are trading with a negative yield—this includes 96% of all Swiss government bonds, 50% of Eurozone gov’t bonds, and 74% of Japanese gov’t bonds.
This intentional action, to price safe investments at levels that defy rational investment sense, has pushed nearly all investors higher and higher up the risk ladder, junk bonds are now just the most recent rendition of investment insanity. This has caused investors to chase stock prices higher and higher because of a phenomenon known colloquially as TINA, “There is no Alternative.” All of this can work for a while, in fact maybe a long while. John Maynard Keynes insightfully wrote, “The market can stay irrational longer than you can stay solvent.” When irrationality is driven by players, i.e. the worldwide Central Banks, with a seemingly endless supply of money, guessing when the music will stop is anybody’s guess. For now the music and the dancing continues. One day, however, it will come to a halt. The question is: will the music fade or will the needle be jerked off the record causing a horrible scratching sound? I’m hoping for a fade but fear a jerk. But there I go again speaking of records and needles, I really am getting old.
Thanks for reading,
Zach and Dave
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