Are the markets about to tip over?
Source: Public Domain Images
In the twelfth century the city of Pisa, Italy, began to erect a bell-tower for the local cathedral. But the subsoil they built upon was unstable on one side, and the structure began to lean to one side. Construction was halted, and the ground settled. After a century, construction was resumed, and the architect compensated for the tilt. The tower was finally completed 200 years after it was started.
The Leaning Tower of Pisa is an enduring symbol of seeming instability. It doesn’t look like it should be able to stand. But the structure survived for centuries without any extraordinary interventions. (Although in the last few decades the authorities have adjusted the ground around the tower to stop it from leaning any further.) Its apparent imbalance is part of its beauty.
The markets seem unsustainable today. About a third of government debt in the Euro-zone has a negative yield. Swiss Government 10-year bonds yield -0.17%. There’s something that violates our sense of balance and proportion about a market that pays an issuer to borrow money. That’s not supposed to happen. Negative yields violate some of the foundational assumptions of finance. And so many investors have positioned their portfolios for rising rates.
But like the people waiting for the bell-tower in Pisa to fall, they may have to wait a while. The irrational negative yields in Europe make sense when other factors are considered. When theory and observation contradict one another, the theory needs to be revised.
Markets can remain irrational for a long, long time. It’s dangerous to bet against them.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!