Opinion | Will the mother of all asset price bubbles burst in 2020?4 min read . Updated: 10 Dec 2019, 12:37 PM IST
Negative yields on debt in the developed world are flashing warning signs for the global economy
I begin with a confession. I am a broken clock when it comes to predicting the outlook for financial markets, and especially the outlook for the US stock market. A broken clock shows the same time. However, in one respect, I am worse than a broken clock. With a broken clock, one knows the two occasions on which it would show the correct time every 24 hours. With my predictions for the stock market, I cannot even be sure when (and if) I would be right. So, you stand forewarned.
Ever since the US Federal Reserve’s policy of quantitative easing (QE)—well, the targeting of interest rates at the long-end of the yield curve—was first announced in late 2008, and then later re-announced, developed country stocks have done well and better than emerging market stocks. But, a recent discussion paper published by Amundi Asset Management shows that QE has been bad for pension assets (Quantitative Easing: The End Of The Road For Pension Investors, 3 December 2019).
More than half of European pension managers said that quantitative easing had undermined the long-term viability of pension plans, while 62% said that QE had overinflated pension liabilities. More ominously, “sixty-five per cent of 38 pension consultants advising on €1.4 trillion who were also surveyed and just over half of pension plans said that QE would be very hard to unravel without huge market volatility". But tell that to the European Central Bank (ECB), the outgoing president of which just doubled down on another round of QE augmented with negative rates.
QE might have hurt pension funds, but stock investors are grateful. It has helped stocks defy fundamentals as they did in the run-up to the crashes of 2000 and 2008. As the US announced its second revision to the calendar third-quarter growth estimate, corporate profits as reported in national accounts showed anaemic growth of 0.4% (year-on-year). This measure of corporate profits has had its share of ups and downs over the past decade. But, through it all, American stock indices have remained unperturbed. For example, between the third quarter of 2014 and the third quarter of 2016, corporate profits declined from $1.792 trillion to $1.621 trillion. The Standard & Poor Index went sideways during this period.
Indeed, during this two-year period, various other indicators of the real economy flashed clear recession signs in the US. But, official gross domestic product (GDP) growth statistics did not confirm a recession.
Then, in the spring of 2016, after a Group of 20 meeting, China, yet again, opened its credit flood gates and all became well with the world, including advanced nations. Further, President Donald Trump’s tax cut boosted American corporate profits, post-tax. However, in the nearly 140-year long history of the average dividend yield of S&P 500 stocks, the current S&P 500 dividend yield of 1.82% is only the second-lowest. The lowest level of around 1% was reached during the internet stock bubble at the turn of the millennium. This yield is the same as the bond yield on the 10-year US Treasury bill. Yet, many commentators think that bonds are in a price bubble and stocks are not.
However, stock markets are not fazed by the grumbling of columnists. They continue to scale new heights. As existing assets become expensive, they make asset-holders wealthier and shut out those who hope to acquire them and have a shot at becoming rich themselves. A survey conducted by Financial Times newspaper and The Peter G. Peterson Foundation revealed that more than 60% of Americans surveyed felt that stock market performance did not have much impact or any impact at all on their financial well-being (Two-Thirds Of Americans Do Not Feel The Benefits Of Wall St Rally, Financial Times, 5 December 2019).
When fundamentals do not support asset prices, statistics can be co-opted to help. An economist at the Bureau of Economic Analysis in the US has calculated that “illegal" activities such as drugs, prostitution, gambling and theft from businesses could add nearly 1% to America’s GDP. In Canada and the UK, it could add 0.4% to the economy. It is a matter of time before these show up as part of official GDP data. In its own way, China is recalculating its GDP numbers. On 22 November, it revised its GDP estimate for 2018 upward by 2.1%. This upward revision would not hurt the cause of doubling China’s GDP in a decade from 2010. After this change, China would just need to report a growth rate of 6.1% in 2020 to achieve that goal.
Finally, Joseph Zidle, chief investment strategist at Blackstone’s private wealth management solutions group, is right to call the negative yields on debt the “mother of all bubbles". Nearly $13 trillion of sovereign debt is currently trading at negative yields. The group’s research draws our attention to another aspect of the current situation that is like the financial crisis of 2008-09. Seemingly unrelated and uncorrelated risks had combined to nearly wreck the global economy then. They may succeed in earnest this time.
But do not forget my warning about the broken clock.
*V. Anantha Nageswaran is the dean of IFMR Graduate School of Business, Krea University. These are the author’s personal views