Halver’s column: Will interest rates become the natural enemy of stocks again? – columns

The main drivers of the global equity rally since 2009 are a torrential money supply and gagged interest rates. The central banks have let stocks – to put it in the language of the spaceship Enterprise – “penetrate into galaxies that no human has ever seen before”. However, doubts are currently growing about the continuation of this liquidity boom. In America, bond yields are already as high as they were before the Corona crisis. So is stocks threatened with a major turnaround in interest rates?

Historically low bond yields have relatively cured the absolute high stock valuation. Government bonds are still more expensive than, for example, US industrial stocks.

Are the ingredients for a major turnaround in interest rates really in place?

Indeed, the US economy is on the verge of a significant recovery. The mood in industry and the service sector has recovered massively.

In addition, President Biden, who will soon be able to rule with a democratic majority in the House of Representatives and in the Senate, will reinforce economic optimism with even more debt. He knows he’ll have to glue the country back together after Donald split. And nothing is more reconciled than with an economic perspective.

Against this background, the Fed expects strong growth, especially in the second half of 2021. The evil T-word is already circulating with her: tapering, i.e. the reduction of net bond purchases.

In this respect, it is initially not surprising that, in line with a recovery in the real economy and an upward turn in inflation expectations, US government bond yields are also rising.

The stock markets looking into the future are already showing themselves to be afraid, like schoolchildren, before their certificates are issued. In fact, if US yields only rose to their cyclical interim high from the end of 2018 – which would still be low in financial history – the interest rate argument for shares would increasingly mutate into a handicap. The relative evaluation buffer would melt like ice in the summer heat. Overpriced stocks came under the hammer. Parking money on the interest rate market could be worthwhile again.

It is true that shares benefit from rising corporate profits through the economic upswing. But the lushness of monetary policy, as a super drug, is losing its clout against sustained stock slumps.

Relaxation of the tense fear of interest

But tapering in the USA will only be very gradual. If anything, the Fed won’t end its bond-buying program until mid-late 2023. The basic interest rate cut will not end because there is no talk of liquidity reduction.

And as a neat note: by 2020 the US will have its national debt by three trillion to 27.6 trillion. US dollars piled up. The threshold of 30 will be exceeded in 2021. Please explain to me mathematically how America will still shoulder its debt service with really higher lending rates.

Anyway, what do American monetary politicians care about yesterday’s gossip? If “God’s Own Country” needs financial support, for example against the Chinese, who are increasingly triumphant in geopolitical and economic terms, the Fed will show its well-known love of the country. She’ll open her wallet faster than the super sprinter Usain Bolt could run in his prime. The Fed is closest to where the need is greatest.

By the way, rising inflation is not a bad thing, no, a good thing for Americans. If it is above the lending rate, private and national debts decrease all by themselves. Why should the US Federal Reserve counter this miraculous healing with interest rate restrictions?

Market economic socialism in Europe speaks against a turnaround in interest rates

It is completely okay for European states to intervene to help in the Corona crisis. However, many politicians understand the Corona crisis as a steep pass for even more state welfare. Unfortunately, citizens quickly get used to the fact that Papa State relieves them of more and more risks and personal responsibility. The return to the social market economy is therefore becoming more and more difficult, if only for electoral populist reasons. In addition, the monetary gifts that will be distributed in the EU from 2021 without much consideration are no reason to move out of your own lethargic comfort zone.

If, however, decreasing willingness to take risks and perform means that the grazed meadows of the old industrial society are not abandoned in order to get to the lush green pastures of digitization, rich in opportunities, then there will also be less economic growth. At some point the rescuing state will lack the financial means for social compensation.

How does he get his money then? Tax increases used to be the first choice. But they would hurt medium-sized companies with a high level of employment. And the particularly wealthy would fall back on a variety of existing depreciation models to avoid taxes.

Fortunately – so think politicians – we have a super wild card. Let’s let the ECB do the dirty work. Let’s just look at them as part of the state. Then the state finances itself more or less from itself and, as the icing on the cake, it continues to pay preferential interest rates.

Overall, neither in the United States nor in our Roman debt union, there are strong arguments that interest rates or bond yields will rise significantly. The low interest rate environment is as much a part of the stock market as the pot is to the lid.

Even if yields should rise somewhat because inflation rates also rise, real interest rates will remain at zero or below. This is not an attractive environment for interest rate paper.

No, interest rates are not becoming the natural enemy of stocks as they used to be. You stay on friendly terms.

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