Where Are You in the Money Queue? – The Rising Bond Yields Effect

By ,

In today’s Money Morning…from cash is trash to a huge cash splash!…the Cantillon effect…the last decade of financial markets has shown us that…and more…

Markets are in a bit of no man’s land right now.

While the charts show most major indices are still within a stone’s throw of all-time highs, rising bond yields have made investors a bit skittish.

That nervousness has shown up mostly in speculative sectors like the tech-focused NASDAQ Index.

Tech-Focused NASDAQ Index

Source: Incredible Charts

[Click to open in a new window]

There’s been a sharp pullback over the last two months, though as you can see on this monthly chart, things aren’t as dire as the tech doomsayers are claiming…not yet anyway.

But markets aren’t about what is, they’re about what will be.

And right now, people are speculating — we are all speculators when it comes to the future — that the era of cheap money is coming to an end.

That’s the rising bond yields I mentioned before. This could be bad news for tech stock investors.

For example, my colleague Greg Canavan has argued strongly that the parabolic rise in big tech was mainly due to them being priced as bond substitutes, due to a world of close to zero interest rates.

[Editor’s note: You can read more of Greg’s insights on this in his ‘Life at Zero’ presentation here.]

That is, they’re priced as yield generating assets due to the amount of steady cash they spit out.

If that’s the case and rates keep rising, then they become less attractive compared to the risk-free rate of bonds and might start to fall in value. Or at least be valued on a more fundamental basis.

Anyway, we’ll see I suppose.

But you can see two similar pullbacks in 2018 and early 2020 where tech investors shrugged off short-term falls.

Who’s to say that won’t happen again?

But what about the central premise that ‘the era of cheap money is coming to an end’?

I’d argue that’s not exactly correct either. It’s just where this money is coming from.

And the implications of this are important…

Stay up to date with the latest investment trends and opportunities. Click here to learn more.

From cash is trash to a huge cash splash!

Just last week the Biden administration announced they are considering a $3 trillion stimulus package for the US economy.

This isn’t just ‘cheap’ money, it’s free money!

That’s the power of being able to print out a global reserve currency at will.

So, who gets this cash?

As the Times reported:

The president’s advisors will bring him a plan as soon as this week that would divide the recovery proposal into two planks. One would put money into boosting manufacturing, improving transportation systems, expanding broadband access and reducing carbon emissions, according to the newspaper.

The other would focus on reducing economic inequities through investments in paid leave, universal pre-K and community college.

Great news if you’re one of the recipients, I suppose.

What about if you’re not?

Well, it’ll boost the economy argue the big spenders of other people’s money.

That might be true in the short term, though I’d argue in the long term, such prolific spending leads to an eventual debt calamity.

Here you go grandkids, enjoy the debt!

But even in the short term, there’s a lot on inequality when it comes to new money entering into an economy.

You see, the order of this new money flow does actually matter to each person, comparatively speaking.

Whoever gets the new money first has an advantage over later recipients, even if all benefit to a degree.

In fact, it was an 18th century French banker called Richard Cantillon who noticed this a long time ago…

The Cantillon effect

In Cantillon’s time gold was money so being near a gold mine brought advantages.

As reported by Matt Stoller:

Cantillon went on to discuss how money would flow, basically noting that rich people near the mine would spend it on 18th century luxuries like servants and meat pies, prompting a general rise in prices.

Eventually the money would get out to the populace, but until it did, working people would have to pay higher prices without access to the new money that mine owners had. So, there would be inflation, with uneven distribution of purchasing power.

In our system of money today, it’s not gold mines but governments and central bankers that create new money.

And no matter what political stripes they proclaim to wear, the reality is they end up looking after their cronies first.

Right-wing policies of quantitative easing (where money is given to banks first) and ultra-low interest rates show up in the asset values of share markets and property long before they have an effect on economic growth.

The losers here are basic wage earners with less assets (sorry millennials but it’s nothing to do with avocados).

Left-wing direct spending policies — like Biden’s — reward their favourite industries and pet political agendas directly with a cash splash. Jobs for the boys in other words.

Such an environment inevitably results in the corruption of the political class as different groups fight for government largesse.

Or ‘lobbying’ as it’s euphemistically called.

Either way you can see how this fiat money system of ours ends up being warped by vested interests.

It’s always been like this to a degree but the blatant greed of it has gone into hyper-speed since the GFC in 2008.

The financial industry and its various insiders like to laud themselves as independent arbiters of a ‘greater good’.

They cloak themselves in the veneer of respectability that comes with fancy titles, fancy ties, and international travel allowances.

And yet when the sh!t hits the fan, the ‘rules’ are thrown out the window as they bail themselves out first!

The last decade of financial markets has shown us that.

This reality is why I’m such a fan of bitcoin and cryptocurrencies in general.

Are they perfect?

Certainly not.

They’re still works in progress.

But they remove the need for trusted middlemen — who often end up being corruptible insiders anyway — and create a more level playing field.

The supply schedule for new bitcoin for example — there will only ever be 21 million — is programmed into the system.

No bureaucrat or committee of acronyms can change it.

The financialisaton of the current economy is reaching a tipping point. A world where wealth is decreed by your order on the money tree isn’t a fair one.

In my opinion, cryptocurrencies and blockchain technology will bring us back to a free market for money.

Good investing,

Ryan Dinse Signature

Ryan Dinse,
Editor, Money Morning

P.S: Four Well-Positioned Small-Cap Stocks — These innovative Aussie companies are well placed to capitalise on post-lockdown megatrends. Click here to learn more.

About Ryan Dinse

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately…

Pilbara Minerals: June Quarter Sees Lithium Production Rise

Lithium miner Pilbara Minerals Ltd [ASX:PLS] fell on Wednesday after releasing its June quarter production and sales update. Despite a significant increase in June quarter production, the lithium stock was trading down 2.5% in late afternoon trade. PLS was unable to buck the trend, with plenty of lithium stocks falling sharply on Wednesday. At the … Read More

Liontown Shares: Binding Ford Offtake Signed

Liontown Resources [ASX:LTR] shares were flat this morning, after announcements regarding a third Ford offtake and final investment decision (FID) for LTR’s Kathleen Valley Project.

There’s Still Plenty of Interest for Lithium

In today’s Money Morning…the Fed’s losing street cred…follow the long-term trends…good news for lithium…and more…

BlueBet Shares [ASX:BBT] Soar on Expanded US Market Access

Online wagering platform BlueBet Holdings [ASX:BBT] was up as high as 20% this morning after securing market access to a fourth US state.

BWX Shares Fall 35% on Discount Equity Raise and Guidance Downgrade

Natural beauty and wellness retailer BWX’s [ASX:BWX] shares plummeted after revealing a heavily discounted capital raising and mixed trading outlook.

Will the Fed Choose Recession over High Inflation?

According to nearly 70% of leading academic economists polled by the Financial Times earlier this month, the US economy will tip into a recession next year.