Today the Bank of England has responded to falling global growth and rising financial stress, with more misguided policy ‘easing’ aimed at prompting banks to lend more to households that are already drowning in debt. Central bankers only ever had this one idea, and they have flogged it this cycle to sub-zero. The global financial system is already brimming with debts that cannot be repaid, but the wizards of Oz keep hoping to add some more. Willfully blind, we should not expect admission or repentance–at least until after they leave office (or are thrown out).
Future yields tell us about market expectations for economic growth. And with nearly $12 trillion in bonds now yielding less than zero (ie, lenders paying borrowers to take loans) across much of the developed world for terms out to 10 years, government bond markets are forecasting recession as far as the eye can see.
As we suspected it would, this is also continuing to drive global capital flows into the relative safety and yield of North American bond markets. Today the US 10 year yield broke to a fresh all time low of 1.38, significantly below both the 2008 recession and the 2012 European crisis lows. The bond market is seeing less growth ahead than it did in the ‘Great recession’. Food for thought.
With stocks and high yield bonds still at or near all time highs, it also means that the return prospects for the typical balanced investment portfolio held from current levels over the next decade has never been lower: less than 1.3%. As shown in the chart below, portfolio return prospects today are lower than at the stock market peak in 2000, because stocks and corporate bonds are extremely over-valued and investment grade bond yields are a fraction of what they were in 2000 (ie., 1.38% today versus 5.5% then).
10-year Treasury 1.39%. Put another way, bond investors here will earn 1.39%/y in coming decade. Stocks a bit *less* pic.twitter.com/bY0ZSnx6fG
— John P. Hussman (@hussmanjp) July 5, 2016
All of this means that the downside for buy and hold investors has never been larger and the upside never less than right now. It doesn’t have to be this way. Cash does not have to be wasted on toxic assets. But don’t expect most investment managers or advisers to admit this. The majority have to hold capital in harm’s way in order to meet their own fee collection targets. And like central bankers, they will continue to be willfully blind at their clients’ expense.
This leads to a point which is rarely acknowledged in the money management business. The vast majority of products and managers collect significantly higher fees from capital which is allocated to the higher risk equity and corporate debt strategies as compared with cash and investment grade bonds. Hence the money business has an inherent bias in advising that clients place a large weight of their savings in the highest risk/highest fee allocations. This is a huge conflict of interest between ‘advisors’ and their unsuspecting clients. A fiduciary standard requires in law that the advisor highlight to their clients any conflicts of interest between them. The way fees are collected in most investment firms is a huge conflict of interest, and yet, virtually no one is mentioning it.