It’s been so easy making money on stocks around the planet that the actual easy money has been forgotten.
The European Central Bank Thursday is expected to signal intent to curtail long-running mass purchases of corporate debt. Of course the Federal Reserve, the American central bank, sees higher interest rates yet last raised in March, so who do you believe?
And why should you care?
Because there are two giant macro inputs to stocks, investors and public companies: currencies and interest rates. Central banks pull the biggest levers affecting both. Stocks are denominated in currencies that when fluctuating can spawn violent ripples (2008 was a huge spike in the dollar).
With central banks coordinating currency policies to smooth fluctuations, price volatility has appeared to vanish. It’s not gone, however. It’s just stabilized – like the amazing stabilization technology in my Google Pixel phone. Whizzing down the road on a bike I can hold my camera behind me and film followers and the video is dead stock still. Nary a jitter. The central bank of phones.
If I wipe out on the bike, no amount of stabilization will compensate. That’s not an intended analogy but maybe it’s apropos. We’ve all been easy riders. Stocks don’t fall, they just rise. Prices hardly vary save to pop periodically.
Back to the ECB, a Wall Street Journal article yesterday offers perspective. Last year the ECB bought $115 billion of corporate bonds, more than the entire eligible supply of $103 billion.
One result is high-risk companies are getting investment grade financing with a taxpayer guarantee. The thinking is that buying risky corporate borrowings drives more economic output. But the public was outraged about backstops for giant banks in the financial crisis. One wonders how taxpayers will respond if those bonds fall apart.
The WSJ article notes that a mere 0.2% tick up for bond yields would wipe out a year’s worth of returns (because the value of the bonds would decline, and bond buyers are now chasing rising prices more than yield).
The ECB isn’t buying bank bonds, but it’s bought so much other issuance that a quarter of continental investment grade corporate debt has negative yields. Investors are paying for the privilege of owning them because prices keep rising (it’s a bit like equities where rich multiples mean investors are paying for the privilege of one-way stocks).
Low interest rates remove a clarion call about the value of money and the presence of risk. Investors priced out of high-yield bonds by central banks instead look to other even riskier things for returns. Those traditionally buying investment grade instruments are forced to move to higher risk too, for a desired return.
Everywhere risk increases yet paradoxically it appears to vanish, because interest rates say there is none and all prices rise.
For investor-relations professionals today, it’s a reminder of how important your job is. So many things besides story now populate your whiteboard, ranging from passive investment, to a shrinking sellside, to macro factors. Keep execs informed.
And investors, never forget that your assets are as good as the stability of the money denominating them, and creating value is hard work. We’ve been easy riders a long time. We may get a hint Thursday from the ECB of hills ahead.