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Reading Between The (Head)lines

When nonproductive assets such as precious metals are worth more than productive ones like stocks and bonds that's not a good sign. (AP)

• 6/10/2016

Economy: You can learn an awful lot about what’s going on in the world these days just by reading a few of the headlines scrolling across your computer. Late last week was no different.
Three headlines in particular caught our attention: “Bond Yields Around The World Fall To Records On Growth Outlook,” “Why Big Investors Think It’s Time To Hoard Gold,” and “Baby Bust: 2015 Had Lowest U.S. Fertility Rate Ever, Down 600,000 Births.”
All of these seemingly disparate headlines have a very profound — and sadly, negative — message to deliver about global economic growth: Namely, the boom times are over. But it doesn’t have to be this way.
Start with the bond yields. Some $10 trillion in global government bonds now carry a negative interest rate, with 14 countries now charging savers for the privilege of holding their bonds. Former Pimco bond guru Bill Gross called this a “supernova that will explode one day.”
Why is this so negative? As investors will tell you, in addition to signaling supply and demand for credit, government bond rates also serve as a useful forecasting tool for GDP. So the sudden collapse of bond rates around the world suggests investors are incredibly bearish about global economic growth and deflation for the next two to 10 years at least.
Then there’s gold. Gold has always been a store of alternative value in times of turmoil. So it’s no surprise that with a scary presidential contest in the U.S., Brexit in Europe, negative interest rates, an increasingly assertive China and Russia, and turmoil in the Mideast, that gold would start to regain its appeal.
But if, as the gold headline suggests, “big investors” are moving into gold, what does it also say? One thing: That nonproductive assets (gold, precious metals) are worth more these days than productive ones (stocks, bonds). That’s never a good sign.
Finally there’s the baby bust. Yes, fertility rates have been trending down for years around the world. But the U.S. had been an exception — until the Great Recession. Now our actuarial estimates for the number of workers, retirees and households are all going to have to be dramatically reduced. Since both population growth and productivity growth are both barely at 1%, it’s not very bullish for our ability to expand output in the long run.
As we said, it doesn’t have to be this way.
We got here because of bad policies, both on the fiscal side of government and the monetary side. Fed Chair Janet Yellen said last week that investors should stop looking to the Fed for guidance on interest rates. She’s right. There’s nothing else the Fed can do. It should stop sending conflicting signals to the markets — take some time off.
Instead, investors should turn their focus to fiscal policies, both in the U.S. and around the world. Meddling governments have raised taxes, spending, debt and regulation to such levels that productive investment is barely profitable. Not surprisingly, new business formation is weak and so is job growth.
How do we fix it? Reversing those disastrous policies through the ballot box is the only real fix left.