Courtesy of Mish.
Steen Jakobsen, chief economists and CIO of Saxo Bank has some interesting observations on the illusion of low interest rates and the vital flaw in Pimco’s bullishness at a market peak.
Please consider From Here to Eternity in the Age of Low Interest Rates.
Eternity is here. Eternity in low interest rates for longer. Eternity in excess return from stock markets, eternity in no growth, eternity in low productivity, eternity in chasing yields. The chasing yield game now joined by central banks like the Swiss National Bank and recently also big investors like Pimco, who at the top of the market no longer sees the stock market in a bubble!
The main common denominator is low interest rates – so where the market and Pimco mathematically correctly uses the low interest rates for longer as an input which produces a superior return, a few of us who were around in 1987,1992, 1998, 2000, and 2007/08 know that market tends to mean-revert. This concept that if we have a superior return over a longer period, it will need to be met by a negative performance to average “out” is dead now.
Stock Market Bubble
We have a generation of traders and investors who see any dip as a buying opportunity and policy makers who argues everything being equal, it’s better to have a stock market bubble than disorderly markets and depression.
The illusion is almost perfect now – probably the best argued and most confidently performed illusion in my career.
Zero Bound Rates
We learn in economics that the marginal cost of capital is the true allocator of capital. Whoever can and will pay the highest marginal price of money gets it – in today’s world.
However, EVERYONE and I mean everyone inside the 20 percent of the economy which is the listed companies and banks get whatever credit they want and need indiscriminately of their marginal cost and risk. The land of zero bound rates.
To make the example even more clear, this afternoon I could go to my bank manager with a proposal to put 100 or even 1,000s of hot dog stands on the main street in Fredensborg(where I live) – my expected return will be infinite as long as the interest rate is zero!!!!!
To make the mistake, in my opinion, of thinking that ANY analysis can really be done when we are at zero percent is the vital flaw of Pimco, SNB, policy makers and the stock market, so I am not saying the Dow at 100,000 is not possible, neither will I second guess Pimco’s new found bullishness, I am merely applying history, maths, engineering and economics laws to the issue….
