Does life imitate art?
Graham Greene’s novel The End of the Affair seems to have something to say to investors. In this work, Greene describes a torrid affair between a young novelist and the wife of a sweet-but-boring civil servant. Set in London during the Blitz, at one point all three characters in this triangle seem to be saying “Get me out of here!”
That’s what investors, the Fed, and the markets seem to be saying right now. The Fed has engineered ultra-low rates for an ultra-long time—over four years. Markets are becoming distorted. But the global economy remains stuck in second gear, and central banks around the world are expanding the money supply as fast as they can. The airwaves are filled with scolds and Cassandras prophesying gloom and doom. And no one knows how to get out of the fix we’re in.
It’s a fix for investors, because short-term rates are 2% below inflation. You have to go out ten years just to break even. It’s a fix for the Fed because they keep shoveling cash at the problem, with no assurance they can unwind their position without creating more problems. And it’s a fix for markets because risk is becoming under-priced, and the last couple times that happened it didn’t end well.
Graham Green’s affair ends when the novelist’s house is hit by a bomb and the heroine vows to break off the relationship if her lover’s life is spared. It’s a climatic, life-changing moment. In the same way, it seems that something explosive, something uncontrolled will be needed to get us out of our interest-rate torpor.
And just like in the novel, you never know when the bomb will hit.
Douglas R. Tengdin, CFA
Chief Investment Officer