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Foreign Affairs, Debt, and Bond Madness

October 14, 2019

We’re already expecting slowing growth and market volatility in the near term. But three current situations could radically change our fortunes for the worse.

 

First is the U.S. and China’s ongoing trade and currency battle. This seems to get worse as the countries’ dialog drags on.

 

The second is the unfolding cold war between the U.S. and China, much of which has to do with technology. Unlike the trade/currency negotiations, this battle is at least not getting any worse.

 

The third scenario is tension with Iran. Thankfully, both nations seemingly realize military escalation will do nobody any good. Still, mistakes happen, and it doesn’t take long for things to ravel out of control.

 

A Common Thread

 

 

The common thread throughout most of our problems is debt. We have too much debt.

 

As government debt rises, business conditions depress. Economic growth reduces, and interest rates continue to fall.

 

But central banks and President Trump still think low rates solve all problems. They don’t solve everything.

 

Despite desires to have rates at 0 percent or less, it won’t have the desired effect. Japan and others have shown that to be true over time.

 

Normally, low real yields mean economic growth. But now they just seem to mean the return on capital has declined.

 

With low or negative real yields, investors and entrepreneurs won’t earn real returns that align with the risks required to achieve them. So, funds for investment will decline, productivity gains will be nullified, and growth prospects will erode.

 

Of course, the Fed is going to cut rates further – exactly what shouldn’t happen now. It also erred when raising rates in 2018. Rates should’ve slowly risen from 2013 on.

 

This long string of mistakes leaves few good choices now. And the politics involved only complicate things.

 

Bond Market Absurdity

 

More than $17 trillion of bond market investments now carry a negative interest rate. It’s a quarter of the whole bond market and 43 percent of international bonds.

 

That means people are paying to lend money. “Here’s $100,000. I’ll take $98,000 at the end. Thanks.”

 

I don’t get it. There is no logical reason for it.

 

Best yet, something like this has never happened before. So, we have no idea how it might turn out.

 

Wild times!

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