The Negative Yield Matrix: Red Pill or Blue Pill?
Red pill or blue pill?
In the 1999 movie “The Matrix,” the main character Neo (Keanu Reeves) is faced with this choice. Take the red pill and face the “truth of reality”. Take the blue pill and live the “ignorance of illusion.”
Morpheus (Laurence Fishburne) explains to Neo:
“This is your last chance. After this, there is no turning back. You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I’m offering is the truth. Nothing more.”
Neo takes the red pill.
In reflecting on the global economy today, most seem to be choosing the other path: the blue pill. And who could blame them?
The blue pill represents the dreamy idea that central bankers can save the world through easy monetary policies that force interest rates to 0% and even negative levels, artificially driving up asset prices. As long as asset prices are going up, the policies are deemed to be “working” regardless of the reality in the real economy. And as long as money is cheap, governments and consumers can continue to borrow and spend beyond their means.
Face the truth.
On the other hand, taking the red pill would mean facing the truth that unending easy money policies only borrow from the future, and the virtuous “wealth effect” sold to the masses has yet to take place after six long years of unprecedented easing. The red pill means acknowledging that you have the slowest U.S. expansion in history, another recession in Japan, tepid growth in Europe, and the slowest growth in China since 2009. And that you have this backdrop in spite of (and perhaps, because of) record central bank easing and government borrowing/spending.
The red pill means merely considering the possibility, as Randall Forsyth wrote this past weekend in Barron’s, that artificially “low-interest rates are backfiring,” forcing savers to save more as the income expected from a risk-free portfolio has been reduced to nothing. The red pill means perhaps trying to understand the comments of Stan Druckenmiller (Bloomberg interview last week), who considers current 0% Fed policy a “job reducer” and an “economic reducer” that is a “terrible risk-reward” in its sixth year.
Understandably, though, the blue pill is more appealing. The dream world matrix of negative yields throughout Europe is an easy choice over the looming reality of market-based yields in Greece.
And so global policymakers and their minions have successfully convinced the intelligentsia that driving up asset prices (from a deflated bubble that they created in the last cycle) is all that matters and that there are no adverse consequences to their actions. To markets and the 0.1% dream world, perhaps this is true. But to the rest of us who live in the red pill reality, what’s going on today can only be described as madness.
This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
CHARLIE BILELLO, CMT
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors. Previously he held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University. He has also done a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
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