- Bernanke & Yellen Have Engineered A Financial Markets Neutron Star
by Tim Price via The Cobden Centre, via www.zerohedge.com
… I never expected to encounter a neutron star but Messrs Bernanke and Yellen at the US Federal Reserve have been kind enough to engineer one for us. Like CERN it’s been something of an international collaboration – Messrs Carney and Draghi have also pitched in to do their bit. The hybrid of Quantative Easing (QE) and Zero Interest Rate Policy (ZIRP), our current monetary neutron star has succeeded in collapsing the yields of just about every financial asset. The tractor beam of ZIRP in particular is difficult to evade. Just ask Janet Yellen. After one of the most widely anticipated FOMC meetings in history, she has boldly decided to do precisely nothing.
Today’s investors are not exactly a lucky generation.Assuming they’ve survived two precipitous declines in stock markets in the course of a decade, they’re now faced with overpriced stocks, overpriced bonds, overpriced everything. The Economist cites a Deutsche Bank study pointing out that for 15 countries going back as far as 1800, the average prices of equities, bonds and residential property stand at an all-time high. In terms of investment yield, very little escapes the monetary policy neutron star.
Assuming prices matter, the implications for future returns are somewhat grave. “This is most obvious,” writes The Economist, “in the case of bonds: a yield of 2% means the nominal return if you hold the bond to maturity will be 2%. The real return may even be negative if inflation rises.” Gilt investors today dream of even 2% nominal returns: 5 year UK government paper struggles to reach a nominal yield of 1.3%. 5 year US Treasuries offer a munificent 1.4%.
Absent some entirely magical economic developments, Janet Yellen looks set to be an unlucky Fed chairman. There is a growing risk that the fabric of the financial system may start to unravel during her tenure.