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Market paradoxes demand new ideas

It is the most fundamental premise of investing yet it is increasingly redundant: invest your money rather than hiding it under the mattress.

In a world in which there is perhaps $15trn (€13.5trn) of negative yielding assets it might make sense for investors to keep their money under their mattresses after all. If not literally then perhaps in a savings account. At least bank savers do not generally suffer the indignity of having to pay to deposit their cash.

Of course, some investors who are both skilled and lucky can get around the problem by moving into higher-yielding assets such as direct lending. But that is not a realistic solution for most. Typically they are wary of the risks and complexity involved and in some cases they often have to hold significant amounts of government debt for regulatory reasons.

In any case, the huge volume of negative yielding assets indicates structural problems not just in the bond markets but in the equity markets too. A traditional way of valuing equities is against the ‘risk-free rate’ provided by using short-term government bonds as a benchmark. But with rates turning negative it is not clear how meaningful this measure is any more.

The inflated character of the bond markets – with low yields the flip side of high prices – does help to explain the peculiar behaviour of the equities. Despite recent dips in equity prices they are still at elevated levels since a significant number of investors seem to have shifted assets from the pricey bond market.

market paradoxes demand new ideas

This is all even leaving aside the recent inversion of the yield curve, a warning sign of recession. Indeed, the inversion is perhaps the most normal feature of what are peculiar conditions.

The staggering volume of negative yielding debt is just one of several features that are hard to square with conventional economic thinking. For example, there is a huge amount of excitement about internet-related innovation – a technology that might transform production methods – yet productivity growth is anaemic across the western world. And unemployment is low in many developed countries – normally associated with a boom – yet economic growth is sluggish.

These apparent paradoxes suggest that new thinking is necessary to resolve such anomalies. It is not sufficient to give glib answers such as the rise of social media or demographic change. If these are offered as explanations then it is necessary to show how they can account for the markets and the economy today.

There are no simple ways of explaining the world’s current plight. 

Daniel Ben-Ami,
Deputy Editor
+daniel.ben-ami@ipe.com

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