Blain’s Morning Porridge – Sept 5th 2019
“Slipping down Raki and reading Maynard Keynes…”
We really should focus on the signals emanating from bond markets. Forget the current political madness – yesterday saw a number of key moments for bond markets: UK Chancellor Sajid Javid hitting the spend button in the UK (whether it actually happens is a moot point), another $30 bln new issuance day in the US, BAWAG launching a 10-year negative yield Covered Bond, Spain about to launch a 50 year issue at a smidge over nothing, and Christine Lagarde lecturing the European Parliament about the need for Fiscal Policy initiatives.
It really feels like we are at something of a nexus for bonds and fiscal spending. Central Bankers and politicians are tinkering with new ideas (ie: old ones rehashed) about Monetary policy – because nothing they tried re QE and zero rates really worked the last 10-years. I can’t help but feel it’s like something out of The Walking Dead – the Neo-Keynesians have suddenly risen and now stalk the Earth. (Queue Thriller on the turntable…)
Politicians now see low interest rates as a phenomenal opportunity to sort out the bleak mess of the last 10-years of Austerity driven under-investment, and spend economies back into growth. It looks attractive. And, if they’d started 10-years ago.. then we’d probably not be where we are today…
Of course, corporates would be mad not to take advantage of current ultra-low rates to borrow. But what are they going to spend the money on? More distorting stock buy-backs and dividend recharges back to private equity owners? Should investors be worried about the growing leverage? If the crunch comes – well, 5% of issuers might default, but the rest will be fine… ish. Meanwhile, ultra-low rates are great for stocks. Not because companies are inherently more profitable, but largely because low rates make stocks relatively more attractive compared to low-yielding bonds, and encourage corporate buy-backs which further push up prices!
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