Something is occurring in the global credit markets that is quite likely unprecedented in financial history.
The amount of negative yielding bonds has recently registered an all-time high – pushing beyond $12 trillion and now above the previous record set in 2016. Lenders are paying borrowers for the ‘privilege’ of lending them money, or borrowers are being paid to borrow.
Further, Italy and Austria came to market issuing very long duration bonds. Austria managed to get a 98-year bond issue at a 1.17% interest rate (it was about four times oversubscribed). Italy, despite its economic and political risk and challenges, concluded a 48-year issue at an incredible 2.85% yield.
These developments imply that investors seem desperate for yield, but more importantly that they may be very complacent toward risk.
Negative yields turn decades of accepted financial norms on their head, impacting how we understand matters such as the time value of money, and with serious implications for the pricing of money and thus risk in markets. The ramifications of such a growing development cannot be brushed aside as its impact could be widespread. For example, how do retirement funds for whom such bonds are an important asset class in their portfolio deal with this?
Negative yields are not the only change.
The double-edged sword of tech
Other noted developments are the rapid change and enhancements in technology. With this come risks to existing jobs that might be replaced by technological advancements. While productive capacity and efficiencies may be enhanced, the potential replacement of human resources is an ever-present concern.
Albeit that new jobs may be created in the process, it may impact a generation of people trained and skilled in disciplines that cannot compete with technology.
Is the world on its way to inadvertently curtailing the very markets (workers as consumers) to which it is aiming to sell?
What is the end game – the ultimate implications and consequences – of this?
The cryptic crypto space
Adding to the developments, cryptocurrencies have been in vogue. Their volatility has been quite a wild ride for investors in this space. US Federal Reserve chair Jerome Powell called for a moratorium on developing the Facebook cryptocurrency Libra, with privacy and money laundering two of the issues he brought up when making this call, at least until it could be properly vetted.
US President Donald Trump has also called for such ventures to be subject to due US banking regulations and requirements. To what extent these developments will potentially impact the existing financial structure, if allowed, remains to be seen. Governments and central banks will not accept threats to their powers that such developments potentially pose.
Autocracy on the rise
It is also a fact that authoritarian tendencies have been on the rise all over the world. One need only observe the leadership and the policies they pursue in a number of countries such as the US, Russia and Turkey – and China removing the presidential term limit, leading to a potential president for life.
Global expansion, global contraction?
“The global expansion is now the longest in modern history,” says Dario Perkins, MD of global macro at TS Lombard. “But this impressive record masks low and patchy growth, dismal productivity and clear polarisation.”
As long as debt continues to grow as it is doing presently, the risk is that the world will stay in a slow-growth economic environment at best, if not in recession at some point. Much research has shown that a continued increase in debt will reduce GDP growth over time as the marginal contribution to economic growth declines with ever growing debt levels beyond a certain point.
The post 2008 global financial crisis (GFC) period is ‘a new normal’ as some would put it, thereby recognising its unprecedented nature. Given the softer economic growth environment, a number of central banks have gone dovish with policy. It is remarkable that after 10 years of emergency policy measures, the global economic environment still needs the ‘life support’ of quantitative easing and dovish monetary policy.
There are limits to monetary action and, should it be inadequate, policy focus may likely shift to fiscal actions in an attempt to ‘keep the show on the road’.
A euphemism for ‘this doesn’t make sense’
What I find striking is the use of the word ‘despite’ in media headlines over the last while. For example, Stocks rally despite ongoing trade tensions, or Stocks rally despite weak US jobs numbers.
‘Despite’ could be another way of saying price action in stocks is not making much sense to most conventional market observers.
Furthermore, price moves have been quite dramatic – and seemingly disconnected – in response to news. For a largely macro policy/stimulus-driven market since the GFC, we are currently observing its fragility when suddenly faced with changes in policy actions (in this case the escalation of trade wars spilling over into currency wars), further compounded by slowing global growth momentum.
And so change – in essence catalysed by human actions – remains rather inevitable as the above examples illustrate.
Whether we are on the cusp of major inflection points or change is up to market pundits and the astute to discern. We do not know for certain what the future really holds. The wise will simply accept this and know that conventional market wisdom may be confounded in different dispensations.
Fabian de Beer is director of investments at Mergence Investment Managers.