Many observers find it difficult to understand the price developments of the stock exchanges during the serious corona pandemic. Since the great financial crisis 12 years ago, which began as the American real estate crisis in 2007, old certainties have shifted. The term of the “new normal” made the rounds at the time. Since then, historical models in terms of dimension and length of time do not match the observable developments.
But that doesn’t make them illogical. On the contrary: For more than ten years, the financial markets have been showing increasing skepticism about states and their intervening control efforts. The emergence of private currencies can be interpreted as a corresponding phenomenon. But more important is the flight of money into the stock markets.
After the central banks abolished adequate interest rates on government bonds, the states implicitly recognize the thesis of secular stagnation, because interest rates do reflect the growth dynamics of an economy. Aging populations, structural over-indebtedness of states, high levels of regulation and enormous tax and contribution burdens (2021 will again bring additional taxes in Germany) limit the growth potential of many economies.
Debt amount becomes meaningless
The current capital allocation does not correctly show the opportunity / risk ratio of the asset classes because government regulations and restrictions (e.g. risk coverage) stand in the way of a purely economic allocation. The high oversubscriptions that are regularly reported when government bonds with negative yields are issued, show that the bond markets have lost their functionality. The rating assessments also show how insignificant a debtor’s debt amount is for his rating. How else can it be explained that the government bonds of the United States of America are always given the top AAA rating. Whether a few trillion dollars more or less was spent does not seem to matter to the rating agencies at all. Apparently these are not absolute assessments, but at best relative evaluations.
The process reminds me of the marketing of Internet stocks during the dot-com boom at the end of the last century. There it was argued by interested parties that a price / earnings ratio of 70 would be favorable for Cisco, because Juniper was trading with a PER of 120. The end of this relativism, which is essentially a nihilism, went down in the stock market annals.
The rising stock exchange prices since the beginning of this year indicate a change in the asset allocation of market participants. Compared to government bonds, some popular and market-wide stocks are already considered “safe havens”. Of course, the experienced investor will only accept the terms security and shares for long periods of time and subject to good diversification. However, it is rather doubtful whether there are many investors who really act for the long term. The most recent price fireworks for cryptocurrencies are also fueled by lack of interest and, last but not least, distrust of so-called fiat money and thus of state financial behavior.
As a rule, the decisive factor is what happens first in the USA. There, foreign and domestic institutions are now spurning investments in low-yield government bonds. The dollar and treasuries were correspondingly weak recently. Market participants assume that the Fed will compensate for the drop in demand with freshly printed money. There is almost a flight into stocks, with some price capers occurring. The new normal is likely to mean that future equity investments will structurally take up a larger part of the asset allocation.
Christoph Bruns is fund manager, board member and main shareholder of the investment company Loys AG. Here you will find more columns by Christoph Bruns