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Pomona Wealth Market Comment November 2019 - Trick or Treat? 🎃 🍬

In keeping with the season, the Fed has dispensed more treats to the markets: despite historically low unemployment, solid wage growth and decent household purchases this year, the Fed has now offered a third rate cut since the summer. Its target policy range is now 75 basis points lower, at 1.5 to 1.75 per cent. With Fed move, all major central banks and the IMF now agree that low and negative interest rates will be with us for some time to come. As this realization has been seeping into savers’ and bond investors’ portfolios, equity investors – despite all the political issues – have enjoyed a volatile but positive year.

Now is Halloween and we should look at scary things before we return to our equity party:

  • In the EU, we have become used to negative rates on government bonds, i.e. we pay the governments to hold our cash. Italy, which was the epicenter of budget overruns, also borrows at negative yields offering savers to maintain their cash against a fee for the Italian Treasury. On top of negative yielding government debt, we now have about EUR 1 trillion in corporate debt with negative yields. That is spooky.

  • If you are dependent on investing your assets into bonds, can you still earn some money despite the negative rates? The answer is: maybe, if you are patient. The real rate – after stripping out inflation – becomes positive in the US after 13 years. In Europe, with bonds from governments of Germany, France and Italy, it would take you 30 years. This will haunt us as lower yields will impact on insurance and retirement plans which must invest a sizeable portion of their assets in fixed income securities. That is scary.

  • For our readers with interest in the UK economy, the debt level in peacetime is on the rise, has crossed the 90% bar and is likely to expand further when all the Brexit costs are fully accounted for. We leave the following graph for you to ponder this effect on the currency markets

At Halloween, when our friendly neighbor dispenses sweets our children do not consider cavities and obesity but rather on the immediate satisfaction of a pleasurable experience. The same applies to the markets. The Fed treat was followed by a return of the animal spirits and the indexes jumped. For now, all is well in equity-land as the only market to go to for some positive returns. Tomorrow, Halloween is over, and we will forget the scary things and digest the that that the Fed has proffered on us.

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