It used to be that the central banks were part of the markets, all of the markets. It used to be the consensus viewpoint that they had a large influence on the short end of the Yield Curve but not on the long end of the Yield Curve. It used to be, as exemplified by the "Bond Vigilantes," that large financial institutions, and large money managers, could have a major impact on interest rates, and yields, because the amount of money that they wielded.
All of this is no longer the case!
The line in the sand was the financial crisis of 2008/2009. The world's central bank entered the markets to save the financial system. They learned what they could do as a result of this and they have never left. What they learned is that they could dominate and control the markets, utilizing their "Crown of Creation" cash, which is exactly what they have been doing ever since.
The central banks have gone from being "a force" to being "The Force," and it is a position that they are not going to give up because they can't give it up. In the first place, these people are the only people on Earth that will not go to jail for creating money. In fact, it is part of their job to create money. Consequently, no institution on the planet can compete with them as no one else is allowed to create money. All anyone can do is follow along and try to front-run what they plan to do next.
"The Force will be with you. Always."
- Obi-Wan Kenobi, Star Wars
Having said all of this, I have not gone far enough. All of the world's central banks report to a nation, or a group of nations, as is the case with the European Central Bank. This means that regardless of the hype about "Independence" that these banks represent countries that have a budget and social programs that must be paid for and so these nations have learned what their central banks can do and they have pushed them to lower borrowing costs, interest rates, so that the nation's (nations') budget and social programs can be afforded. In effect, between the various countries and their central banks, they have rigged the system. They have created "Gig Economies." The world has changed!
"You can't stop the change, any more than you can stop the suns from setting."
- Shmi Skywalker, Star Wars
If you think I am pushing the boundaries then I invite you to consider that the universe of negative-yielding bonds grew about $1.2 trillion last week pushing the total past $13 trillion for the first time ever in history. Bloomberg stated that,
Joining the club of government debt with 10-year yields below zero this week were Austria, Sweden and France. Japanese and German rates plumbed fresh all-time lows amid a global bond rally that even got Wall Street pondering life, with Treasuries yields under 1.00%.
Some 40% of global bonds are now yielding less than 1.00%, according to data compiled by Bloomberg. It's not just all sovereign debt either. In the investment-grade market, negative-yielding debt now comprises almost 25% of the total amount outstanding. If I would have said this would happen prior to the 2008/2009 crisis every person on Wall Street would have thought that I had lost my mind and yet, now, the unthinkable has become the reality.
For thousands of years, the debtor paid interest to the lender to get money. Now we face a totally new paradigm where get debtor gets interest for borrowing money. It is crazy. It is nuts. It is unbelievable, really, but it is where we are in the present cycle.
Then I next invite you to consider absolute yields:
COUNTRY 10 YR. YIELD SPREAD TO U.S. 10 YR.
U.S. 1.95% -----
Canada 1.47% -48 bps
Switzerland -0.69% -264 bps
Germany -0.40% -199 bps
France -0.12% -207 bps
Italy 1.67% -28 bps
Greece 2.03% +8 bps
Japan -0.17% -212 bps
*Data according to Bloomberg
"The dark side of the Force is a pathway to many abilities some consider to be unnatural."
- Chancellor Palpatine, Star Wars
There is nothing natural, I assert, in the above data. The United States currently has the best economy, and the largest economy, and the most liquid bond markets, of any major nation on Earth. Yet, with the exception of Greece, the highest yield for its 10 year debt.
At first blush it is because the world's central banks are manipulating the debt by creating money from nothing but keystrokes and buying bonds with it. Yet our thinking needs to go further, much further. These central banks represent nations, countries, and most of the world's central banks aren't anywhere close to being as "Independent" as the Fed. They are much more controlled by their governments, so it must be said, be realized, which will be difficult for some of you, that Germany, France, Switzerland, Japan, and the rest, are manipulating their interest rates for their own benefit while, at the same time, to the detriment of the United States.
In my opinion, President Trump has the right, if not the obligation, to object to what the Fed is doing as the Fed was created, and the policies implemented, by several Acts of Congress. Yet, in my view, American politics is not the primary instigator here, as the Fed does have the power to make its own "Independent" decisions. Europe and Japan are the main culprits, as I said, in the drive to ever lower and lower interest rates as they cannot afford their governmental budgets. The problem here, as I see it, is that there is no end in sight, because they can't afford anything else.
Then, you have to ask yourself what all of this means. I have been pondering this question for months now and I have finally reached a few conclusions. First, it means that U.S. interest rates are heading lower from here, as the United States has to compete with all of these other nations and while the Fed may call it "uncertainty," I call it "governmental intervention" on a scale never before seen in history. Creating money from nothing allows anything to be afforded and since the markets are now global, the Fed is going to get pushed, "forced," by the other central banks, and the nations they represent, into lowering our rates further to protect American interests. We are now in a "Nightmare Scenario," in my estimation, and the Fed as America's central bank will have no choice except to keep lowering rates as well, just to maintain America's position.
So, it is going to be lower and lower yields for everything, which will help the costs of America's borrowing along with corporate borrowing, mortgage rates, student loan debt and borrowing by individuals. That is the plus side, as we get "forced" to go along. The negative side is that savers and pension funds and the like are in the "Big Squeeze." Pew Charitable Trusts states that the median pension fund assumption, for the State Pension Funds in the United States, is 7.50%. Well, with the Bloomberg Treasury Index yielding 1.91% and the Bloomberg American Corporate Index yielding 3.11% and the Bloomberg American High Yield Index yielding 5.80% you begin to realize that bonds, for the pension funds, have become non-starters. They are losing investments from the "get-go."
Around the next bend, you then realize that Real Estate and the equity markets are going to go up and UP in price. This is because so much money will get forced into them, as so much money gets forced out of bonds. Then you also have to come to grips with the fact that some state and corporate pension funds are likely to be forced into bankruptcy, as mistakes are made, and as their median assumptions probably cannot be obtained in any market.
"In time, the suffering of your people will persuade you to see our point of view."
- Nute Gunray, Star Wars
So, there you have it. Equities up, Real Estate up, Bond yields down and all because of global political pressure. It is the "Force" alright. We are absolutely being "Forced."
"What if I told you that the Republic was now under the control of a Dark Lord of the Sith?"
- Count Dooku, Star Wars
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.