The November massacre
December 1, 2016
The article also published on THE TIMES OF ISRAEL magazine.
November 2016 has finally finished, not a moment too soon.
Obviously, this was an historic month — yada, yada, yada. Yet, over and above the fact that Trump won, leaving the global elite/ Establishment shocked and horrified, most people are blissfully unaware what else was historic about the outgoing month — with regard to a) things that have already happened and are fact, not endless speculation about what might happen; and b) things as concrete as their money and wealth, not abstract issues such as ‘threats to democracy’.
Having mentioned those dirty words, ‘money’ and ‘wealth’, I can suggest — although I can’t prove — that most people who are plugged into the news could tell you that “in November, after the election results shock, stock markets soared”, so that investors did well. In simple terms, the rich got richer — which seems kinda logical: if you elect a billionaire real-estate and media mogul to the top job, you expect him to look after his peers and, ultimately, himself.
Yet if that’s so obvious — that Trump as President is “good for the markets” — then kindly explain this to me. Up to and including election day — nay, until 2.50am EST on November 9 — there was a total consensus that a Trump victory would be bad, possibly catastrophic, for everything and everyone, most certainly including the US economy and the global financial markets.
On the basis of that common wisdom, those same global financial markets went into a blue funk on the evening of November 8, as the stream of results made it steadily clearer that Trump was emerging as the victor. Then, after the president-elect made his victory speech — in which he didn’t say anything outrageous, ridiculous or insulting, but instead spoke calmly and positively — the markets turned on a dime and proceeded to expunge the earlier losses, eventually ending the day sharply higher. That rally continued almost uninterruptedly for over two weeks, making November 2016 into an historic month for stocks.
In tandem with the overnight change of direction in stocks and many other markets, came an overnight reversal of the underlying common wisdom. Trump, we now learned, was not ‘bad for the economy’, either in the US or globally. On the contrary, he was excellent for it. He was going to unleash a yyuuuuge programme of infrastructure investment and also cut corporate taxes, and allow US companies to repatriate the yyuuuuuge amounts of money they are holding overseas to avoid paying US taxes, and and and…in a nutshell, Trump was gonna make America great again.
This was GOOD FOR (most) STOCKS and, lo and behold, the prices of (most) stocks soared. People who own stocks made hefty paper profits. That is what the mainstream media reported, that’s what most people know — and it’s true. The trouble is that it’s not the whole truth. It’s actually only a small part of the truth.
Because although (most) stock prices rose — at least in the US and also Japan, although not in most other countries — there is something much more important than stocks. It’s called bonds and, in terms of economic and even financial importance, there is simply no contest between them. There is faaaar more money in bonds and the impact of bond prices — via their inverse, called bond yields — on the real economy is infinitely greater than that of stocks.
The unfortunate fact is that bond prices tanked in November. Not just in America, but all over the world. It is estimated that the global bond market suffered a loss of $1.7 trillion dollars in November — an amount of money so yyuuuuge it’s difficult to grasp, but it’s equivalent to over 10% of the entire American economy. In other words, not only do the losses in bonds make the gains in stocks pale into insignificance, they also overshadow the fiscal stimulus package that Trump is supposedly going to put into place over the next year or two, maybe, we’ll see, depends…
Of course, the November bond massacre is only a market movement, it’s on paper and, unless you actually sold bonds at the lower prices, nothing real has happened. That’s what your broker will tell you. As usual, s/he’s either lying or s/he knows nothing about economics — or, most likely, both.
When your broker tells you that you made $x profit on your stocks last month, that’s also on paper. But you can borrow real money against the increased value of your stock portfolio and buy real things with that money. In any event, you feel richer thanks to your increased paper wealth and that impacts your behaviour — you will spend more and/or save less.
The same, but opposite, is true with regard to paper losses. You feel less wealthy and you behave accordingly. You may buy an extra bottle of booze, to drown your sorrows, but there will be no spending spree.
But suppose nobody tells you. The media don’t talk about it and your broker doesn’t phone to share the (bad) news. You get statements in the snail mail or electronically, but don’t bother to read them. Has nothing happened?
This isn’t a philosophical exercise — ‘a tree fell in the forest, but no-one was present to see or hear’…This is the real world, and it’s just become $1.7 trillion poorer, because the price of bonds has fallen and their yields have risen. Going forward, everybody will have to pay more for new loans, because the price of money has gone up — the short-term rates, controlled by the central banks, will soon follow the long-term, market-determined rates.
However, even though owners of bonds — such as your pension fund — have suffered those losses and even though the higher cost of borrowing will depress the demand for new loans (think mortgages, house prices — you begin to connect the dots), it’s still only a passing event. Before prices went down, they had gone up, so ‘it’s just markets’…
Thus, what ultimately matters is whether the sharpest monthly rise in bond yields and most severe fall in bond prices in several decades is simply an event, or is actually the signal of a fundamental change in trend. If it is the former, then it’s happened and we can draw a line under it and move ahead.
It is, however, entirely possible — and, I believe, very likely — that the latter will prove to be the case. We have witnessed — over the course of 2016, but most dramatically in November — the end of a multi-decade bull market in bond prices stretching back to the early 1980s. Over this period, the yield to redemption on American government 10-year bonds fell from over 15% per annum to a low of 1.3% per annum earlier this year.
The trend was global: for most of 2016, the yields on the 10-year bonds of the Japanese, German and other governments’ were negative — when you lent them money, they promised to repay you less than you lent them.
If that absurd situation has now ended and the world has entered a new era of rising interest rates and bond yields, then the world is going to be an entirely different place from what it has been, in innumerable ways — most of them undesirable.
In this scenario, the American election was merely the trigger for an earthquake that had been building up subterraneanly for months and years. In this scenario, Trump and his plans — if he has any — hardly matter. There are far more powerful forces at work.
So, yes, the future is extremely uncertain. But if you want to know which way the wind is blowing, ignore the cacophony surrounding Trump and pay no attention to reports of new all-time highs for share indices in America. Just keep track of the bond market.