Tags: Sloan | bond | yields | markets

Fortune's Sloan: Financial Markets Have Gone Cuckoo

By    |   Friday, 05 December 2014 11:53 AM

For those who may wonder if U.S. financial assets are distorted and far out of alignment with reality, it's worth noting that Apple — and even Italy — can now borrow money more cheaply than Uncle Sam can.

The rate on 10-year Treasury securities has been trading at 2.28 percent, while two of the poorest nations of Europe were paying less than that to borrow. Italy was paying 1.98 percent and Spain was paying only 1.83 percent.

"Have financial markets lost their collective mind? In some ways, it's starting to look like that," Fortune Senior Editor at Large Allan Sloan wrote in a column for The Washington Post.

He noted the U.S. government can print dollars to redeem its debt, while European nations cannot — they must leave it up to the European Central Bank to authorize printing of euros.

Sloan said his "favorite irrationality" is the fact that Apple recently sold 8- and 12-year euro-denominated securities at 1.08 percent and 1.67 percent, respectively, far below comparable U.S. Treasurys that sold for 2.16 percent and 2.45 percent.

"Yes, Apple may be so profitable that it coins money in the metaphorical sense. But it doesn't do so in the literal sense, and the U.S. government does."

In his view, bidding wars for high-end commercial and residential real estate in New York and San Francisco, and nosebleed prices being paid at art auctions, are additional signals that something is seriously amiss.

"People, including me, have said for years that the bond market is a bubble that will pop when rates rise. But so far, anyone ignoring these warnings has reaped hefty returns as falling interest rates have driven up prices of existing securities."

Sloan's cautious conclusion is that "if you feel you can't afford to risk substantial losses on your investments or if the world simply seems too weird for you, there's no disgrace in stashing cash in a money market fund."

Veteran bond fund manager Bill Gross, who oversees the Janus Global Unconstrained Bond Fund, wrote in his December outlook, that it is probably time for investors to "take some chips off the table" because of epic wrong turns taken by central banks in the U.S. and elsewhere.

Federal Reserve Chair Janet Yellen and her central bank cohorts in Japan and Europe have essentially tried to solve a global debt crisis with more debt – an outlandish strategy that Gross compares to fairy tales and nursery rhymes.

Gross posed a series of questions for Yellen and her ilk.

"How could policymakers have allowed so much debt to be created in the first place, and then failed to regulate their own system accordingly? How could they have thought that money printing and debt creation could create wealth instead of just more and more debt?

"How could fiscal authorities have stood by and attempted to balance budgets as opposed to borrowing cheaply and investing the proceeds in infrastructure and innovation? It has been a nursery rhyme experience for sure, but more than likely without a fairytale ending."

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For those who may wonder if U.S. financial assets are distorted and far out of alignment with reality, it's worth noting that Apple — and even Italy — can now borrow money more cheaply than Uncle Sam can.
Sloan, bond, yields, markets
503
2014-53-05
Friday, 05 December 2014 11:53 AM
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