Want proof we're still living in abnormal times? The bond market is telling us that many advanced economies won't see much in the way of nominal growth over the next decade.
In the wake of the Swiss National Bank's decision to ditch its currency floor and move deposit rates further into negative territory, investors actually lined up to pay the government for the privilege of holding on to their money for a period of 10 years.
According to Bank of America Merrill Lynch, there is now $7.3-trillion (U.S.) in debt that has a minus sign in front of the yield, courtesy of the euro zone, Japan and Switzerland.
Holding such a fixed-income product outright, says CIBC World Markets chief economist Avery Shenfeld, is a "Ponzi scheme."
The reliance upon a "greater fool" who's willing to pay a higher price has traditionally been a hallmark sign of speculative excess.
"We're setting ourselves up for financial market dislocations when, at some point, that ride comes to an end and someone holds the bag on large losses," Mr. Shenfeld said.
While investing is often unfairly equated with gambling in a casino, there's a fair comparison to be made here: The house is destined to win. Headlining the list of potential losers are sovereign wealth funds, insurance companies and pension funds, which are mandated to hold a set amount of bonds with a variety of maturities.
Expansionary central bank policies are not only helping to prop up developed market economies, but also equities around the world. Ultra-low bond yields are the fulcrum for stock markets: They push investors toward these riskier assets, promoting multiple expansion, while making it less expensive for companies to engage in debt-fuelled stock buybacks that boost earnings per share merely by shrinking the denominator.
These central bank shockers have been coming fast and furious – and, for Canadians, quite close to home. That's because accommodative monetary policy is causing headaches for central bankers, especially those in emerging markets.
While the Swiss move got all the headlines last week, India's central bank governor Raghuram Rajan also surprised with a rate cut. Although this was cast as a response to sliding inflation in light of the slump in oil prices, the governor's op-ed published prior to this announcement told a different tale. In fact, his reasons were very similar to those of his counterpart in Switzerland: A desire to prevent a wave of inflows into the nation.
"If not properly managed, these flows can precipitate a credit and asset-price boom and drive up exchange rates," he wrote. "When developed-country monetary policies are eventually tightened, some of the capital is likely to depart."
Either the bond market is right, which has depressing implications of its own, or we're going to see some turmoil as yields rise and central banks remove liquidity due to the improvements in their economies. Where that money gets sucked out from will be anyone's guess.
Even under this best-case scenario, it would take a very graceful exit to keep the damage from spilling over from financial markets into the real economy. As central bankers attempt to play Goldilocks for their own porridge, they remain ever mindful that the table on which this bowl rests remains wobbly.