Seeing as Well as a Mask Wearer with Glasses

Wednesday, 29 July 2020
Melbourne, Australia
By James Woodburn


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Living through lockdown Mark II in Melbourne sucks.

I was at the local park yesterday, getting my kids out for a run around. The poor things are cooped up all day. For some bizarre reason, the school throws more ‘tasks’ at them for home schooling than it does for a regular day. And some of them are just pointless.

Here’s just one example.

For PE, my daughter had to record her distance for long jump. But because not everyone can get access to a long jump pit, she had to measure her jump from a standing start. She then submits the distance and — so I’m told anyway — ribbons will be awarded based on who jumped the furthest.  


That is just one example of the state of education in ‘red’ Victoria.

I probably shouldn’t be surprised. Dan Andrews’ handling of this virus has been disastrous. The only people he had to look after in all this were the elderly. That’s the highest risk group. That’s where he could have exerted his authoritarian instincts with some justification.

But no, that’s not how authoritarians, or the apparatus of government, works. And now we have outbreaks in nursing homes and rising deaths of the most vulnerable.

But wear a mask everyone! The government is looking out for you.

Such were the dark thoughts going through my mind yesterday at the park. Wearing a mask, constantly fogging up my glasses, with the nearest person passing by about 20 metres away, just brought home the insanity of big authoritarian government.

I’m all for wearing masks where social distancing is unavoidable. But regardless of where you are? Insane.

This insanity isn’t just confined to Victoria, though.

Investors are living it every day, all around the world.

Central banks, having not done quite enough since 2008, have pushed their accelerator hard to the floor since March. As you can see in the chart below, the world’s major central banks have expanded their balance sheets to US$20.3 trillion.

So much ‘money printing’. Surely it should ‘work’ this time around!

Port Phillip Publishing

Source: Yardeni Research

[Click to open in a new window]

By now, it should be very clear to anyone with an ounce of independent thought that central bank ‘money printing’ doesn’t work. It’s been going on for more than 10 years and the only inflation we’ve had is in asset prices.

Their actions do nothing for the real economy and therefore nothing for the average person. In fact, their policies hurt the broader population.

Yet still we cheerlead from the sidelines and hope, fingers crossed, that this time it will be enough to get things moving.

I’m sorry to tell you, they are only making things worse.

Take a look at the US 10-year government bond yield in the chart below. It’s been trending lower since 2007. It’s actually been trending lower for a lot longer than that, but at least yields rose from the early 2000s recession through to the 2007 peak.

Port Phillip Publishing

Source: Yardeni Research

[Click to open in a new window]

So did the stock market.

Rising bond yields AND a rising market are a decent combination. It suggests a genuinely strengthening economy.

FALLING bond yields and a rising stock market, like we’ve seen since late 2018? Not so much.

As you can see in the chart, bond yields peaked in late 2018. That was when the bond investors realised the economy could not sustain a strong enough growth rate to justify yields in the 3%-plus range. The 2016–18 expansion was done.

The bond market anticipated the Fed. In September 2019, the repo market blew up (I won’t get into that today) and the Fed changed course. If you look at the first chart, that’s when the red line started rising again.

On Monday, the 10-year bond yield fell to its lowest level since the panic lows of March.

So, despite TRILLIONS of fresh money printing from central banks, bond yields are telling you the economic situation looks as bad as it did back in March, when things were very bad indeed.

In other words, the bond market is telling you that central bank money printing isn’t helping the economy one iota. In fact, it’s probably making things worse.

That’s because central bank asset purchases don’t flow through to the economy. All they do is add to bank reserves. They don’t make banks increase their lending. 

Commercial banks create credit (and money) through the process of lending. Central banks don’t.

Because the monetary system is so screwed up, banks are increasingly reluctant to lend. That’s why bond yields are so low. They’re telling you the economy is in bad shape.

I often get the response that bond yields are so low because central banks are artificially holding them down. I don’t buy it. The bond market is huge (much bigger than the equity market). If private investors were genuinely concerned about inflation, they would overwhelm central banks with their selling.

That’s not happening. And it won’t happen.

I’m not saying the stock market rally can’t continue. Although I have my doubts.

But I am saying this idea of ‘money printing’ and coming inflation is one you should question.

Because the world’s biggest market — the bond market — is telling you that idea is nothing more than a myth.

The equity market, on the other hand, can see about as clearly as a mask wearer with glasses.