- Why government bond yields are at their highest in over 20 years…
- This time is different…
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Dear reader,
Mr. Torsten Slok is Partner and Chief Economist at Apollo Investments.
Here he cites reasons why government bond yields dangle at their highest point in over 20 years:
- renewed inflationary pressure from elevated energy prices as the Middle East conflict disrupts global oil supply,
- persistently large government deficits requiring ever-increasing bond issuance,
- the end of central bank quantitative easing with the Fed balance sheet potentially shrinking, and
- investors demanding higher term premiums and inflation premiums amid deglobalization and increased geopolitical fragmentation.
- With no clear resolution in sight on any of these fronts, the era of artificially suppressed yields appears firmly behind us.
- In short, rates will stay higher for longer, and investors should plan accordingly.
Investors should plan accordingly. Yet they give very little evidence that they are planning accordingly.
Investor Amnesia
United States margin debt registers record levels… and has leapt some 38% year-over-year.
Never before have investors borrowed so much money to purchase so many stocks. Many of these are overvalued stocks — wildly overvalued stocks in many instances.
Meantime, leveraged “long” exchange-traded funds (ETFs) are hauling in over three times the inflows as leveraged “short” ETFs.
Thus the bulking majority of investors are down with severe amnesia.
“The financial memory,” argued John Kenneth Galbraith, “should be assumed to last, at a maximum, no more than 20 years.”
Why 20 years?
- This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius.
Today’s crop of investors, I submit, is mightily impressed with its own innovative genius.
It Seems the Financial Memory Is Now More a Matter of Months, Not Years
Yet Mr. Galbraith authored these words in 1990, some 36 years ago…
Before the internet spread its net. Before asocial media. Before the Federal Reserve could clear out the memory centers… compress the attention span… and addle the judgment.
Thus I hazard the financial memory is presently far less than 20 years.
I am tempted to place it at several months, in fact.
Investors have forgotten.
They have forgotten the dot-coms. They have forgotten subprime mortgages.
“This time is different,” runs the eternal refrain. And it always is different — in the particulars.
A dot-com boom is not a housing boom is not an artificial intelligence boom. And as I have argued before:
It is these particulars that fox and deceive investors. It is why they believe this time is different.
That is precisely why it is always the same.
It is precisely why investors perpetually stumble into the snare.
It is precisely why we believe they will come to grief.
Stratospheric Stock Valuations
At 39.6, today’s CAPE ratio on the S&P 500 once again approaches a stratospheric 40 — despite today’s multiple imponderables and uncertainties.
That is, stocks are very nearly the costliest ever, second only to 1999–2000. They are, as I often argue, “priced for perfection.
Yet as in 2000, today’s stock market buglers pay little heed to valuations.
They assure us that today’s conditions warrant these stratospheric valuations. Stocks are not nearly so costly as valuations indicate.
“Besides, the Fed has our back” is the tune they whistle.
It does sound familiar, all too familiar. The lyrics may differ somewhat but the tunes rhyme in every significant respect.
The Fed Might Not Be There Next Time
Yet investors do not appear to realize that the Federal Reserve may not “have their back” at present.
Inflation is proving too great a menace. And it is far likelier that the Federal Reserve will elevate interest rates before it depresses them.
Should the existing trend carry forward… the inflation rate may well exceed 5% by the November elections.
And the Federal Reserve cannot depress the interest rate under such conditions… even if the president’s man chairs it.
Yet the fools are rushing in, as they so predictably do at such times as these.
I hazard they are heading for a mighty harpooning.
Yet they are convinced — as they were last time, as they will be the next time, as they will be for all time — that this time is different.
“Experience runs a hard school,” as I am fond to quote old Benny Franklin.
Yet as he concluded, ruefully, “fools will learn in no other.”
Regards,
Brian Maher
for Freedom Financial News
