Central bankers are the key
actors in our current economic theater of the absurd. It would be impossible
for me to take them seriously if not for their nearly unlimited power. Watching
these people operate in the financial markets is sort of like watching a ten
year old drive a Ferrari. There is just a little too much horsepower under the
hood given the limited abilities of the driver.
Finally, Mario Draghi appears
to be able to deliver on his “whatever it takes” promise and we will see the
Eurozone commence with a 60 billion euro per month money printing and financial
asset buying orgy.
This is having the typical
inflationary impact on financial asset prices that we have come to expect from
the out of control world of central bankers.
In the Eurozone alone yields
on more than 1.4 trillion of assets have now gone negative as prices are bid up
in front of the coming central bank buying:
Worldwide, Bloomberg reports
that more than $4 trillion of sovereign bonds carry a negative yield.
The implications of this are
fascinating. For example, quite soon we should expect gold to become the
world’s highest yielding asset as a result of this latest central bank foolishness,
and I am sure that this move to ultra low and negative bond yields is putting
the recent bid under the price of the yellow metal. Central banks are powerful, but they can’t
control everything and I am sure that gold’s recent lift in price has annoyed them
somewhat.
The new European QE is going
to see central banks trading away currency that yields zero in order to buy assets
with a negative yield. Just brilliant!
No private investor would
enter a carry-trade like that, but it is just another day at the office in the
world of central banking.
The absurd implications of
negative sovereign yields are also quite incredible:
Governments can deleverage by
increasing the amount of debt they now issue. Issue enough debt with a negative
yield and at maturity you can be debt free, or even generate some equity.
Taxes are not required in a
land where investors are keen to finance the government with negative yields. Just imagine the social implications of this
once the voters figure it out.
Heck, if money printing can
create wealth and if sovereign bonds really are worth more in real terms because of the printing press, then
not only can taxes be easily dispensed with, but so can all work.
Adding to all of the
absurdity of negative yields is the fact that it is occurring precisely because
of central bank induced inflation. In a bizarre “Emperor’s New Clothes” sort of
way, Draghi can’t see the obvious inflation that he is creating, and the crowd
of investors, for the moment, is going along with it.
Draghi at his recent press
conference when asked if money printing will lead to inflation:
I think the best way
to answer this is, have we seen lots of inflation since the QE program started?
Have we seen that? And now it's quite a few years (since) we started. You know,
our experience since we have these press conferences goes back to a little more
than three years. In these three years we've lowered interest rates, I don't
know how many times, four or five, six times maybe. And each time someone was
saying, ‘this is going to be terribly expansionary. There will be inflation.’
Some people voted against lowering interest rates way back at the end of
November 2013. We did OMT. We did the LTROs. We did TLTROs. And somehow this
runaway inflation hasn't come yet. So what I'm saying is that certainly the
jury is still out. But (there) must be a statute of limitations also for the
people who say there will be inflation. Yes, when please? Tell me within what?”
Clearly, in Draghi’s mind the
increase in prices, and yield declines, in the sovereign bond market that he
has induced (with the aid of other central banks, of course) doesn’t represent
inflation. I beg to differ as this sure looks like price inflation to me:
Greece Ten Tear Bond Yields
Italy Ten Year Bond Yields
Portugal Ten Year Bond Yields
Source: Trading Economics
Negative sovereign bond
yields in major countries and a collapse in the yields of the bonds of less fiscally sound countries like Greece, Italy
and Portugal are symptoms of monetary inflation and they serve to distort the
structure of the economy and create malinvestment as do all prices that are
artificially manufactured.
The financial world has
entered the realm of the surreal, and it would be fascinating to watch if its
consequences weren’t quite so dire.
Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.
Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.
