Leaning Markets

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.

Source: Bloomberg

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
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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By | 2017-07-17T12:22:59+00:00 April 14th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
Leave a comment if you have any questions—I read them all!
– And Follow me on Twitter @GlobalMarketUpd

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