March 3, 2019 A Jones

Risk/Reward Vol. 409

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

Not much happened in the equity markets this week. They closed slightly negative but remain up double digits year to date and up 5% for the past 12 months. This annualized return is not spectacular given the performance of the past decade, but is approximately twice what one can achieve in short to medium term bonds. As loyal readers know, I remain disappointed in the returns available via bonds which have yielded very little over the past ten years. The average annual interest rate in US government securities was 6.6% in 2001. Today it is 2.5%. Despite some upward movement in 2018, rates appear destined to remain LESS THAN HALF their long term average for the foreseeable future.

Why, you ask?

As detailed previously, central banks world wide have taken extraordinary steps since the financial crisis of 2008 to suppress interest rates. They manipulated short term rates and then literally printed money which they used to outbid all other buyers of longer term bonds, mortgages and other debt instruments. (Remember, the higher the bid the lower the yield.) This unprecedented move, termed quantitative easing, crowded all other potential buyers out of these securities. After all, who wants a negative return on one's money, a situation that has persisted in Europe and Japan for several years. Cheap debt has been viewed traditionally as a short term means of spurring consumer spending and corporate investment. But cheap debt orchestrated on a massive scale and a coordinated fashion has proven addictive. We are now hooked.

Here are some facts. Total global debt (government, corporate and consumer) reached $244trillion in 2018 compared to total global income (GDP) of $85 trillion, a ration of 3 to 1. The US is even worse: $69trillion of total debt to income of $19.4 trillion or 3.6 to 1. From 1950 to 1980, our debt to equity ratio was 1.5. Not only is our government mired in debt, so are our corporations, where the debt load is up 50% since 2010, and our households. Can you imagine the drag on our economy should interest rates DOUBLE or TRIPLE to their long term averages? This is the real reason the Fed has curtailed its previously announced plan to return to normal rates. No one can afford it. God forbid we have a recession. We have little if any room to lower rates further. To paraphrase a line from the famous story of addiction, Manchild in the Promised Land, "We gotta a jones."