Time for Fear or Time for Greed
February 15, 2016
A big news topic this week was negative interest rates. While our Fed has started to raise interest rates, other major economies are still cutting rates in a desperate attempt to stimulate growth. Even as overseas rates fall, global investors are trying to find a safe haven during a time of extraordinary uncertainty for global equity markets. The search for safety has created such a demand for some sovereign debt that the interest “payable” on this debt has drifted into the world of negative rates.
There is currently an estimated $5.5 trillion of global debt at zero or lower rates. In other words investors are willing to pay in order to have their money in these bonds. Why? The answer is simple – it is a safe place to hide and wait. In the ’70s the noted Wall Street economist, Henry Kaufman, published a weekly column called the Flow of Funds, which gathered data to track where capital was moving. Investors tend to try to buy things that are cheap or safe, and sell what is expensive or risky. Kaufman believed that tracking capital flows would help investors see which markets had more sellers, and which markets were being bought. The obvious premise being that assets people want to buy usually go up in price.
A flow of funds report for last week would have shown that investors in Japan were coming out of Japanese stocks and buying Japanese government debt. The demand was so great that the interest rate on a ten year Japanese government went negative for the first time ever. Money generally moves because of two core emotions, fear and greed. When fear is in the air investors sell risky assets and flock to those that are safe. Given that Japanese stocks were down 11% for the week, and down 21% in the last 6 weeks, the flight to Japanese government bonds makes sense. But when the fear subsides greed will soon be back.
One sign of greed was shown this week by an “insider” buying some of his company’s stock. In turbulent times investors are even more careful to watch what the insiders are doing with the stock in their companies. The action of insiders is so important, that they are required to report their buying and selling to the SEC and the public.
The U.S. market has had a bad start in 2016, but banking has been particularly challenged. U.S. Bank earnings have been pretty good and bank executives have been rewarded with generous bonuses. Despite the good results, bank stocks have declined partly due to concern about exposure to the energy sector. Against this backdrop, Jamie Dimon, CEO of JP Morgan, decided to use all of his $26 million bonus to buy more of his company’s shares. He obviously felt less fear (buy sovereign debt at zero percent interest) and more greed (buy a potentially undervalued stock). Some argued he was grandstanding, given that his estimated net worth is $1.1 Billion, but $26 million is hardly chump change.
Carl Gambrell
