Money printing has been around for some time – since the GFC – but what we have seen is a massive acceleration since the Covid pandemic.

Coupled with massive fiscal spending by governments, this is having a concerning inflationary effect on financial assets, consumer behaviour and government debt.

This is the view of Tony Cousins, Fund Manager of the Nedgroup Investments Global Cautious Fund who presented at the Nedgroup Investments Global Summit. Cousins cautions investors from long duration fixed-income instruments, saying they simply won’t be allowed to earn a decent return.

We are seeing inflation in financial assets, inflation through consumers receiving cash from their governments and significant increases in broad money supply and mounting government debt. All of these are inflationary and will continue to be a problem for some time.

Cousins says in addition to the increase in money printing, we have also seen the suppression of interest rates.

Interest rates and bond yields have been driven down by Central Banks through quantitative easing programs. This policy is designed to control the yield curve of financial markets to reduce cost of money in the financial system in an attempt to stimulate economies.  The implication for investors is that to earn a real return on capital, after adjusting investment returns for inflation, they have to take on more risk.

Bond yields are no longer being driven by inflationary developments which is leading to very sharply negative real yields.

In most developed market economies, investors are earning close to 0% on their cash deposit savings. For corporate savers, the interest rates offered by most European banks are negative.

When you deduct inflation from the most developed market sovereign bonds across maturities, an investor holding the bond to maturity will earn negative return.

One of the most extreme examples is Germany, where you get a -4% real-yield on a ten-year bond. The 10-year government bond is a zero-coupon security and the nominal yield on this is -0.5%. It’s therefore virtually impossible to earn a positive rate of return on a bond that gives you no income and a negative rate of return. This is the effect of Central Banks driving yields to these low levels.”

This has also happened in the equity market where prices have exploded, not supported by earnings, leaving valuations at extremely high levels, according to Cousins.

“We now find ourselves in a situation where bond yields are at all-time lows with (bond prices at all-time highs) and equities have continued to rally in most developed markets to valuation levels not witnessed since the 1920’s.”

Another effect of this money printing has been the explosion in broad money growth to levels which have not been seen for many years.

The bottom line is that all assets are now expensive driven by ultra-low interest rates and we are yet to see the full repercussions of these policies play out in financial markets”

In these articles we explore why Pyrford International have reduced the equity weighting of the Nedgroup Investment Global Cautious Fund Are equity markets overvalued?, while in this article Do government bonds still add value? we explore why short dated government bonds still make sense to Pyrford in their portfolio construction.