Peeps Say Anything

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This morning on business television, the case was made that "negative rates (real) are the prime case that people are bearish." The logic being that if they weren't bearish they would not accept the bad deal. Last year this thinking was reverse engineered into the often sited evidence that, "The 10 year yield is below 2% so something really bad is happening in the economy."

The Japan experience would for the first argument, mean people have been "bullish" on Japan for over 15 years. The second implies that low yields are "bad." Obviously, neither are correct beyond neighborhood cocktail party chatter. Even Jeremy Seigal could not resist the comparison to the last market high when real yields were over 3, conveniently forgetting Japan. The  US in the 1990's was a good example of the high real rate, strong currency economic tailwind. We were on the steep back slope of dis-inflation and gathering huge amounts of foreign investment - both monetary and fixed. Toyota and BMW built new plants here, the internet technology space was exploding. Tax law favored corporate debt issuance. The proceeding cycle - inflation and aggressive Fed action - influenced investor behavior much stronger and longer than most thought. The idea that people were "bullish" when real rates were at there apex is silly, they hated stocks and bonds.

So what, if anything, does the present persistent negative rate environment tell us about sentiment. First and foremost, hold times have shrunk incredibly over the same cycle. Policy lags to market prices have diminished faster than to economic result. Demographics have shifted and will continue to deteriorate. Boomer portfolios, even after several years of bond inflows, remain tilted toward equity when analyzed in terms of age. Financial repression is a choice but often between poor alternatives. Clearly, the sub-2 10 year benchmark was has been a boon to corporate CFO's not a harbinger of death. The demand side for credit remains spongy even as supply is increased.

A discussion of rates, real or otherwise, without an overlay of where you are in the credit cycle is a fool's game. The context in which structures shift is far more important to an economy than the shifting, just ask Europe. Low yields were common in the US prior to the 60s-80s inflation cycle. The caution we are advising germinates from the idea that such a shift is upon us.

 

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