In today’s global economy, you have to be careful where you step or you might be gobbled up.
At least Tad Rivelle thinks so. The Chief Investment Officer of Fixed Income for the TCW Group, Rivelle highlighted the myriad of dangers in the economic landscape in a note entitled “Here be Dragons.”
Rivelle thinks that a series of unprecedented shifts in the global economy have led investors into uncharted waters, or as they used to write in old maps, where the dragons dwell.
Of particular interest to Rivelle is the unprecedented act of negative interest rates implemented by the Bank of Japan and European Central Bank. To him, the experiment makes very little sense.
“To say [negative interest rate policy] makes no sense is almost tautological,” wrote Rivelle, whose firm has $194.6 billion in assets under management.
“Nobody pays to have their Amazon delivery delayed or their Uber pickup deferred. Consumption now is always prioritised over consumption later, which is why interest rates have been positive for centuries. Is there some set of future expectations that could possibly justify negative yielding debt?”
Rivelle said that if one were to take the current government bond yields as a proxy for the future expectations of the market, the only thing you could read was doom and gloom on the horizon. The problem, however, is that risk assets such as stocks are looking healthy and hitting all-time highs.
This dichotomy, Rivelle explains, means that the BoJ, ECB and central banks are distorting the communications that the market is attempting to make about future expectations and the true, underlying price of their assets. Here’s Rivelle (emphasis added):
“In the mind of the central banker, the capital markets must be stopped dead in their tracks whenever they threaten a ‘tantrum.’ But, in so doing, capital markets are prevented from telling us what true market clearing levels are. And, without good information, coordination loses its effectiveness, leading to low growth and soggy productivity. Low growth — the consequence of inefficient resource use — then becomes the recurring justification for still more central bank rate suppression. The paradigm is not one of self-correction but of doubling down. Keep doubling down and rather than having a series of corrections, you might just end up with a crash.”
This “engineered” system also shows up in other ways, other more well-known “dragons,” from declining profits to an unprecedented gap in real and adjusted earnings of companies to a flattening US Treasury curve, Rivelle said that the economy is facing a whole host of dangerous challenges created primarily by central bankers.
“Our central bankers took the till away from the markets years ago, confident that their policies would chart a course to El Dorado,” he concluded.
“Instead, they have sailed us off the map, into places that financial markets have never been, and should never be.”
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