“Greece rules out possibility of default”
- FT headline, 16.9.2010.
There’s probably merit in seeing the markets through
fresh eyes. But after a couple of weeks away, not much seems to have really
changed. Stocks have been more resilient than we might have thought – but only
a little. Even after the recent rally, the S&P 500 is showing year-to-date
gains of less than 1%; the FTSE 100, of just over 2%; the MSCI World Index, of
just over 1%; and the year is almost three quarters over. This is not exciting
stuff, given the theoretical boost to stocks from interest rates effectively at
zero. These markets look simply tired. But the stock market is, in any event, a
fickle and rumour-driven sideshow by comparison to the main event, which is a
global credit market drowning in government debt. Much of that debt is no
longer worth buying, if it ever was. That this market hasn’t collapsed under
its own weight like some form of paper neutron star is remarkable. What its
failure to collapse means is open to debate. Sceptics point to a bubble in
bonds. Deflationists, a number in which we are content to be counted, point
instead to the widespread investor terror of investing into anything else at a
time when most of the world is engaged in deleveraging and balance sheet
reconstruction. At some point, the inherent insanity of buying government debt
issued by the most heavily indebted entities in the world will become apparent,
and the price evolution of those putatively risk-free assets will become an
interesting learning experience for anyone unlucky enough to be holding them.
But between now and then, whenever then
turns out to be, government bond yields can continue to fall. Japan has shown
the way. Suffice to say, we maintain that the only government bond markets
worth investing into are those where the governments in question have the
resources to pay you back. That effectively excludes most of the developed
world, and certainly most of the G8.
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