You only dance twice
“Financial markets are artificially priced. In the bond market, there is nothing normal about a three year German Bund yielding “minus” 10 basis points.” - William H. Gross, Janus Capital Group
Below summary by Anthony O'brien
Picture perfection or fairy tale endings do not describe the global economy or even its financial markets more than five years after its Minsky/Lehman moment.
While U.S. bond and equity markets have been thrust into a seemingly safe outer orbit, the same cannot be said for other developed and developing nations.
Many economies in turn have entered or are bordering on recessions with limited monetary firepower remaining to promote real growth. The dancing has begun to resemble the last stages of a 1920s cha cha dance off, with partners clinging to each other in a desperate attempt to keep from falling down.
The upshot is that whatever your risk/return persuasion, whether it be stocks, bonds, real estate, or “other,” an “intelligent investor” (as first described by Benjamin Graham in the late 1940s) should be aware that returns almost necessarily cannot equal the magnificent returns of prior decades.
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Frequently Asked Questions about this Article…
Financial markets are considered artificially priced because certain market conditions, like a three-year German Bund yielding negative 10 basis points, are not typical. This suggests that market prices may not accurately reflect the underlying economic realities.
The 'Minsky/Lehman moment' refers to a period of financial instability and crisis, drawing parallels to the collapse of Lehman Brothers in 2008 and the theories of economist Hyman Minsky, who highlighted the inherent instability in financial markets.
U.S. bond and equity markets have been described as being in a seemingly safe outer orbit, indicating relative stability. In contrast, other developed and developing nations are experiencing economic challenges, with some bordering on recessions.
Many economies are facing challenges in promoting real growth due to limited monetary firepower. This means they have fewer tools available to stimulate economic expansion, leading to slower growth or potential recessions.
An 'intelligent investor,' as described by Benjamin Graham, should be aware that returns in the current market are unlikely to match the magnificent returns of prior decades. This suggests a need for cautious and informed investment strategies.
The current economic situation is compared to a 1920s cha cha dance off to illustrate the precariousness and desperation of economies trying to maintain stability, much like dance partners clinging to each other to avoid falling.
A negative yield on bonds, such as the three-year German Bund, indicates that investors are willing to pay more for the bond than they will receive in return, often due to a lack of better investment alternatives or as a safe haven during economic uncertainty.
Everyday investors should approach the current financial market conditions with caution and awareness that returns may not be as high as in previous decades. It's important to stay informed and consider diversified investment strategies to manage risk.
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