TINA – Are we in the ZIRC? II – “Do Gentlemen really prefer Bonds?”

2019-07-16

3 Months ago I was wondering “In short: TINA! There Is No Alternative to productive assets, meaning There is No Alternative to equities. Therefore could Mr. Bull Market persist endlessly?” and I gave some evidence, by looking at Swiss equity indices over the past 95 years, that Mr. Market 2019 could reach a memorable performance, i.e. the magical 40%, rarely attained in the past.

This contrasts considerably to the ZIRC (Zero Interest Rate Capitalism) environment that I described in the same April email.  At the time I didn’t compare the Mr. Market 2019 projection vs. Bond rates, which is something I would like to examine now.  Let’s therefore, look at (negative) 10-year bond yield sovereign borrowers.  But first things first!  How many such countries are there?  Have an educated guess!  Let me help you: Switzerland -0.60bp, Germany -0.35bp and Japan -0.15bp. 
But the list is longer: Denmark -0.29, Netherlands -0.19, Austria -0.09, Finland -0.07, and recently France -0.04. To clarify this for everyone, institutions, pensions funds, etc., by investing in sovereign bonds are lending money to the countries that issue them.  In addition the institutions, pension funds, etc. are paying for the privilege of lending the money (because of the negative interest). Apart from a short stint 40 years ago, when Swiss rates were negative for a while (technically in order to punish foreign investors from owning Swiss Francs and preventing the currency from rising further), there is no other example in the recent or distant past.

Ladies & Gentlemen, we are in uncharted territory! We have no idea what the consequences will/might be! Ok, you will argue that this is a loan to a country, and not to a human being with flesh and bones. However, I would argue that our governments are composed of human beings with their strengths & weaknesses.  If you were to propose to anyone to lend them money, say a EUR100’000 over ten years, and that by borrowing money from you they will be rewarded with a total of EUR 6’000 over the course of the loan, guess what do you think would be their reaction?

During the summer lull, relaxing with a glass of iced tea, or any other beverage you fancy, I suggest you give some thought to the endless monetary easing by Central Banks, the current buoyancy of Mr. Market and the possible consequences thereof! I’m keen to hear your comments & reactions.

Oh, and I forgot! 7 years ago, the Greek 10-year bond yield reached 25%. Greece was then on the brink of Grexit. Today the same 10-year sovereign bond is yielding 2.1% - more than 10 times less.

I’m intuitively skeptical about short-sellers like James Chanos, as I don’t particularly share their philosophy, but I tend to agree with his quote:

“Everyone points out Greece's default record, but the history of a lot of sovereign nations is not a good one when it comes to lending them money."