We are seeing history in the making in the bond market today, with an all-time low in 10-year yields in each of the following countries:

  • Germany: 0.70%
  • France: 0.98%
  • Italy: 2.03%
  • Spain: 1.86%
  • Netherlands: 0.81%
  • Portugal: 2.80%
  • Switzerland: 0.31%
  • Japan 0.41%
  • History2

    Source: Bloomberg

    What do each of these countries have in common? Slow to negative economic and wage growth and extreme deflationary pressures. This makes sense as interest rates are a reflection of both growth and inflation.

    The fascinating thing here, though, and why this historic day may go unnoticed by most market participants, is that we have become conditioned to believe weaker growth is a good thing. Why? Because it means more central bank “action” to prop of stock markets in the near-term.

    But stepping away from the stock market, is the race to 0% by global central bankers really a good thing? Only if you believe that short-term stock market prices are the economy. Unfortunately, as I wrote recently, this is becoming further and further from the truth. For if it were, the Japanese economy would be booming today as the Nikkei surges higher. Instead, Japan is slipping into it’s fourth recession since 2008.

    As it turns out, creating financial bubbles and asset price inflation does not create growth and prosperity for all. But don’t expect central bankers to admit this any time soon; they are what you call in poker “pot committed” to this policy. And thus the race to 0% is likely to continue as central bankers increasingly compete with one another in the greatest financial experiment in history.

    Their goal is simple: drive the expected future return on all asset classes to 0% or even negative levels. This in turn will enable governments to continue to borrow beyond their means and convince the masses that things are great and they should spend what little money they have saved because stock prices are going up. In short, it is a policy of borrowing from the future to satisfy the whims of today, delaying the structural reforms necessary to generate real growth.

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