The video below on Janet Yellen’s Senate hearing on Tuesday is also necessary viewing for all investors, but especially those unsure of the costs and risks of Fed policy.
Wellington’s text and the Yellen video provide compelling perspective on just how distorted the global financial system has become.
Wellington J. Denahan: Thank you, Willa. Good morning and, again, welcome to Annaly Capital’s fourth quarter 2014 earnings call. We have a few prepared remarks and then we will open the call for questions. I would like to start by summarizing the global landscape with a few statistics that were compiled by a Wall Street research department.
Global central bank assets now account for $22.5 trillion, a sum larger than the combined GDP of both the U.S. and Japan. The Fed’s balance sheet represents 23 % of the U.S. GDP. Since Lehman Brothers collapsed in the fall of 2008, there have been 550 rate cuts worldwide, which is equivalent to a rate cut every three business days, all of which is largely responsible for the next set of statistics.
52 % of all government bonds in the world currently yield 1 % or less. 83 % of the world’s equity market capitalization is supported by zero interest rate policies. There was approximately $7.3 trillion of negatively yielding government debt in the Eurozone, Japan and Switzerland before the most recent sell off.
When a Fed governor was asked recently if he saw any evidence of an obvious bubble, he replied, and I quote, I don’t think there’s anything on the scale of the housing or Internet bubble right now. The only candidate is bonds, government debt, and other kinds of debt but I’m not counting that, I guess, because that’s us.
As is often the case with humanity, we fancy our present selves as the most intellectually sophisticated and tend to look back on our predecessors as somewhat naive in light of our current knowledge base. There are certainly good reasons for that attitude. Here are a few examples. Up until the late 1800s, bloodletting was a popular prescription for many ills. In fact, George Washington was reportedly a huge proponent and after awakening with a bad sore throat, he asked to be blood let. During the next 16 hours, five to seven pints of blood was drained from his body. Four days later he was dead.
Before microscopes and cell theory, many scientists believed in spontaneous generation as the explanation for how life arose. Right up until the 19th century scientists still believed in it and some even wrote recipes for making animals. One such recipe called for basil placed between two bricks and left in sunlight to produce a scorpion. It wasn’t until 1859 that Louis Pasteur finally put the popular belief to rest.
I mentioned these extreme examples of our lack of intellectual sophistication to emphasize how wrong humanity can prove to be with the benefit of time, discovery, and hindsight. History is littered with longstanding theories and beliefs that ultimately proved incorrect. My hope is that as policymakers of the world continue to prescribe their remedies for the ailing economic patient that they do not render it worse off. As with their predecessors, I suspect there is no doubt in the minds of our central bankers that they are the smartest they’ve ever been. Yet, I fear they are not the smartest they will ever be.
Given the time spent awash in central bank liquidity and the influence it’s had on capital allocators, we maintain a healthy dose of concern about its impacts on the market. We have remained conservative with our leverage and opportunistic with our capital.
Jeremy Jones, CFA
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