Wednesday, August 10, 2016

James Grant: Negative Interest Rates Will End — Badly

Pundits and laypeople alike are unable to grasp why deteriorating true economic indicators and profits are driving equities and bond markets to all-time highs (and record low or negative interest rates).

Conventional wisdom states that declining corporate profits should drive stock prices down.  Yet, equities keep achieving all-time highs. 

Perhaps, the answer is stored in the question.  Due to record low and negative interest rates, stock markets will soar as the cost of borrowing is at all-time lows.  If this sounds like a chicken-or-egg dilemma, it is.  How long this monetary rubber band can be stretched is the essential question--because it will snap at some point.

The rhetorical question can also be answered with possible solutions to this conumdrum.  If bonds continue to yield negative rates, cash becomes more valuable.  The countervailing effect is if negative rates drive up inflation, cash becomes less valuable.

What else is left if inflation causes interest rates to reverse and rise?  Financial markets would plummet if yields rise.  Physical, tangible assets become the currency of last resort.

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