Are We at the End of the Domination of Growth over Value?

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“In the financial world, good ideas become bad ideas through a competitive process of ‘Can you top this?’”
Jim Grant

We live in interesting times, at least when it comes to the financial world. Since the global financial crisis (GFC) shook the financial world more than 10 years ago, central bank balance sheets have continued to expand. As Figure 1 shows, combined total assets of the Fed, ECB, and BoJ have increased by nearly four times.

In a policy world dictated by once-bitten, twice-shy response mechanisms, central banks have been conducting policy with a promise to not let an event like the GFC recur. However, they are confusing the symptoms with the cause. The result is that central banks are too focused on financial market prices. They are conducting policy based on such prices and their tolerance levels for price declines is getting narrower.

The impact of these misplaced policy actions has been to suppress interest rates and fan mispricing of risk. Consider that nearly $13 trillion worth of bonds are priced for negative yields globally. As per a story on ZeroHedge, there are 14 euro-denominated junk bonds that carry a negative yield1. Clearly, market participants are pricing these securities for greater fools.

Figure 1. Central bank balance sheets and the S&P 500 index

Source: Central Banks: Balance Sheets, Yardeni Research, May 20, 2019

Figure 2 shows the long-term interest rates for the U.S. Interest rates are in the all-time low zone.

Figure 2. Long-term interest rates, U.S.

Source: Data from Robert Shiller