By Russ Winter
“It seems there now is huge bullish demand for less than nothing.” – James Grant“It is time to abandon the idea that treasuries are a special asset class, let alone “risk-free”; this no longer makes sense in a G-zero world.” – Merrill Lynch memo to wealthy clients. The term “unstable G-zero world” refers to poor governance (nobody in charge).
Black boxes China, JPM, WFC and Univ. of Michigan put out bullish “reports” on Friday. Besides the black box plays, the other market leaders were so called defensive stocks, toilet paper and cereal makers. The XLP, which represents non-discretionary consumers, trades at a mere 9 implied volatility on the puts, absolutely zero fear there.
There is also a huge bull market and demand for bonds that pay nothing or incredibly even “less than nothing” (to quote Grant here on CNBC). Investors park in some increasingly insolvent sovereign (called by the Ministry of Truth term “core”) , and receive an actual negative yield in nominal terms. When James Grant was asked about income, he suggests with a straight face utilizing the asset class of “walnut trees”, feeling it is far preferable to “risk-off bonds”. That’s the problem with price discovery nowadays, you can’t make this up. Grant’s descriptive of a Jim Carrey “Truman Show” faux-like market state is apt.
Bloomberg provides this chart on bond allocation: Record fictitious capital and chasing rainbows with a 40% allocation. The constant reference to “quality” income and “defensive” and the risk off trade is one of the most worn themes I can recall going back to the TNT bubble. The second chart shows huge in-flows into bonds, especially since the 2008 crisis. The effect on the stock market and real economy is to misallocate capital into stock buyback schemes, and dividend, income players while penalizing capex, and reseach and development.
source: Kevin Depew
About The Author – Russ Winter is a veteran investor, financial writer, world traveler, and he blogs at Winter Watch.
The views and opinions expressed herein are the author’s own, and do not necessarily reflect those of EconMatters.
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