Economic Insights: Markets, Investing, and Inflation – Economic Prism Part 127

Nearly 3,000 years ago, Solomon expressed in Ecclesiastes, “What has been will be again, what has been done will be done again; there is nothing new under the sun.”

However, the rise of negative yielding debt might have made Solomon rethink this idea. It’s fascinating to contemplate how he might have reacted. Current studies indicate that negative interest rates represent an unprecedented development.

Yet, it’s essential to acknowledge that our era isn’t entirely unique. We still gaze up at the night sky in awe, howling at the full moon like early humans. In our daily routines, we continue to dress ourselves one leg at a time.

Though the context may differ, the underlying fantasies remain consistent. To illustrate this point, we turn to Fred Sheehan’s historical essay from December 2006, War of the Nerds:

“Every generation suffers its particular fantasies. A century ago, investors had become so desensitized to the repercussions of war that bond markets across London and Vienna remained unperturbed after the assassination that triggered World War I.” Continue reading →

One of the more bizarre practices of contemporary central banking is the creation of digital monetary credits from thin air, subsequently used to acquire stocks. For those unfamiliar with this sophisticated monetary tactic, it may seem rather surreal. Yet, in some economies, this has become the norm.

Take Japan, for instance; their systematic intervention in the stock market is akin to a dairy farmer tending to his herd. This operation is as much an art as it is a science. A lack of continuity, even for a single day, can amplify discomfort in various areas.

In late April, a Bloomberg report found that the Bank of Japan (BOJ), through its ETF purchases, had become one of the top ten shareholders in nearly 90 percent of the companies listed on the Nikkei 225. Estimates suggested the BOJ was buying about 3 trillion yen ($27.2 billion) in ETFs annually, a figure likely to have increased since then. Continue reading →

The existing capital stock continues to diminish, jeopardizing savers and retirees alike. Yet, central bankers remain indifferent. This indifference stands as one dire consequence of nearly eight years of near-zero interest rate policies.

Another significant outcome is that the equilibrium pricing of capital markets has unraveled. Specifically, bond yields no longer reflect what might be expected from a market-driven price of money informed by the demand for credit. As a result, we are witnessing previously unfathomable interest rate fluctuations with regularity.

Currently, the yield on the 10-Year U.S. Treasury note is plunging. Just recently, it reached a record low yield of 1.34 percent, the lowest historical yield recorded as far back as 1870. The last time interest rates hit a low was in the early 1940s, when they bottomed out around 2 percent. Where rates will finally stabilize this time remains uncertain. Continue reading →

“Myths and legends die hard in America,” noted Hunter S. Thompson in The Great Shark Hunt nearly 40 years ago. While he likely wasn’t reflecting on U.S. Treasury bonds, if he were alive today, he might find today’s Treasury bond bubble to be a curious tale.

Recently, the yield on the 10-Year Treasury note dipped to 1.45 percent, only slightly above the 1.39 percent yield experienced in July 2012. What compels logical individuals to entrust their hard-earned money to the government for a decade in exchange for just a 1.45 percent yield?

Is it the belief that U.S. Treasuries are the safest investment without the risk of default? Is it the myth of American exceptionalism? Perhaps it’s a combination of both—or perhaps it’s neither.

It appears that investors in U.S. Treasuries grapple with the same cognitive dissonance shared by the broader U.S. population as they celebrate Independence each July 4th. Continue reading →