May 5, 2015
[Editor’s note: This letter was written by Tim Price, Director of Investment at PFP Wealth Management in the UK.]
There is one thing riskier than investing in a free market: investing in a rigged market when you think the central bank has your back.
At some point, the free market returns with a vengeance, like a coiled spring made out of pure risk. That time may be coming soon.
Last week, German government 10-year bond yields suddenly spiked from just 8 basis points to 37 basis points.
Now, a 29 basis point (0.29%) jump may not seem like much, but with yields so slender, a move of that magnitude is easily enough to put a few leveraged funds out of business.
Bonds have never been more expensive in human history, and yet their supply has never been higher.
10-year US Treasuries yield just 2.1%. 10-year UK Gilts yield 1.84%. 10-year German government bonds now yield 0.37%. And that bug-in-search-of-a-windshield 10-year Japanese bonds yield 0.32%.
Bloomberg’s William Pesek highlights the tortured logic plaguing Bank of Japan Governor Haruhiko Kuroda as he attempts to escape from the corner of the bond market he has painted himself into:
“[Japan] defies the basic tenets of economics for the nation with the largest total debt, largest ratio of geriatrics and low rates of immigration to have lower bond yields than countries like Singapore, Sweden or Switzerland.”
When one of the world’s government bond markets finally blows up (Japan still looks like the primary candidate, but stranger things have happened), economists will scratch their heads and wonder where it all went wrong.
Wiser souls will wonder how economists could ever have thought that money printing was the answer to anything.
In the introduction Schuettinger and Butler’s outstanding book Forty Centuries of Wage and Price Controls,” David Meiselman writes:
“Despite the clear lessons of history, many governments and public officials still hold the erroneous belief that price controls can and do control inflation. They thereby pursue monetary and fiscal policies that cause inflation, convinced that the inevitable cannot happen.
“When the inevitable does happen, public policy fails and hopes are dashed. Blunders mount, and faith in governments and government officials whose policies caused the mess declines. Political and economic freedoms are impaired and general civility suffers.”
Quantitative easing is a squalid little lie. It appeals to economists with no grasp of history. It pretends that too much debt can be simply resolved through futile attempts at price controls and money printing.
The practical outcome of QE is that it turns the bond market into a no-go area for any rational investor.
We are now in the terminal stages of QE, during which the practical limitations of this fatuous and discredited policy are being revealed.
When you devalue money and distort the supposed risk-free rate, you devalue every aspect of the capital structure, and of society itself.