Monday, July 11, 2016

Money is now going into stocks for yield and Bonds for capital gains

Share prices have soared since Friday morning with all ten of the markets comprising our International Index having risen and with 7 of the 10 rising by more than 1%, as represented by the “green” coloring in the price index below, and as 2 of those 7 have risen by more than 2% and with 1 of those ten… the market in Japan… having risen by more than 4%. It is a spectacle of bullish enthusiasm and the markets are “dancing” to TINA’s tune… There Is No Alternative. Money has no place to go these days other than to the equity markets and the global markets are breaking out to the upside. It is really quite stunning.

As one or two off the wittier and wiser “Wags” commenting upon how the markets are moving have said, we are witnessing a stunning shift in the fundamental view of how capital is to be allocated: that is, money is moving into equities for the yield and is moving into the bond markets for the capital gains. 

This is breaking centuries of capital market allocation theory and it is putting that theory upon its head, because for centuries “serious” money went into the bond market for yield and went into the equity markets for capital gains. Now it is wholly and completely otherwise.

Perhaps this is a permanent change in investment theory, but perhaps not. Perhaps capital will, for the coming decades, move into equities in search of dividends and yield, and perhaps the central banks have so disturbed, distended and destroyed the bond market that money seeking capital gains will indeed flow there. 

After all, what money, in its right mind, would seek to move into Spanish debt yielding dramatically lesser interest rates than US government debt? None, in a truly rational world, with the term “rational” being defined as the action of portfolio managers over the course of the past several hundred years, but in a world over-turned by the monetary authorities at the world’s leading central banks perhaps all of the rules of the past are also over-turned.

As we have argued, just as in the case of physics where the “laws” as understood are either over-turned or severely bent as temperatures approach “absolute zero,” the “laws” of money management are turned on their heads as interest rates approached zero and are certainly turned on their heads as rates have gone into negative territory.