There is a new expression doing the rounds in financial markets – “The Keynesian Put” and it is a phrase that I think we are all going to become quite familiar with over the next couple of years.
Those who have been in markets for a long time will already be familiar with the “Greenspan Put”: so coined (in 1998) because the Federal Reserve’s aggressive monetary policy essentially meant that investors could happily invest in risk assets, because Chairman Greenspan would protect you from losses i.e. he was going to keep interest rates low and print lots of money. This was followed by the Bernanke Put and the Yellen Put, not to mention corresponding actions from Draghi, Kuroda and many other central bankers.
As a result, the world has become awash with central bank liquidity over the last couple of years and, unsurprisingly, risk assets have had their day in the sun, in fact all asset classes have gone up. But central banks appear to be running out of road and negative interest rates are leading to problems in the banking system: how does a bank lend money when it is forced to charge its customers for their savings? Margin pressure is hurting banking business models, with the net effect that they are struggling to lend to the end consumer, which is essentially why central banks increased liquidity in the first place – to encourage the filtering of this liquidity into the real economy. Incredibly low and negative rates globally have also had the opposite of effect of forcing people to save more and, ironically, consumer demand has been lower than expected.
So if central banks have run out of magic, what is the next trick to encourage economic growth? It would appear that if consumers are loathe to spend, governments now have to. Hence the Keynesian Put- the implicit promise that fiscal authorities will spend more in a bid to keep growth and inflation humming along in the global economy. If this does come to pass – and Michael Hartnett, Chief Investment Strategist at Bank of America Merrill Lynch certainly thinks it will – then this should assist in the next leg up in global equities.
As the above graph indicates, bond yields are currently very low, so it makes sense for governments to borrow money and spend, as it is very cheap to do so. However, as governments become less fiscally prudent and attempt to spend their way out of the low growth environment, this will not be bullish for bond investors. At current sky-high valuations, I would not be advocating a long position in sovereign bonds, especially those on negative yields.The Keynesian Put