It is a sad fact of life, or potentially a damning indictment of human psychology, that whenever there is an overwhelming consensus within financial markets it often pays to do the exact opposite.
Investors in technology stocks in the late 1990s can testify to this, as can those whose belief in 2005/06 that US house prices could only go up prompted an allocation to ever-more esoteric products packaged around subprime mortgages. History is replete with these instances.
Falling on deaf ears
However, not every investor falls victim to the mania; they are merely an ignored minority whose pleading for everyone to see sense is met with a response that “they just don’t get it” and “this time it’s different”.
Tony Dye, chief investment officer for Phillips and Drew in the late 1990s, became known as ‘Dr Doom’ for his insistence that stockmarkets were overvalued and his wholesale avoidance of technology stocks.
Performance suffered and he was sacked in February 1999, just months before the US technology sector began its three-year, 67% plunge.
During every investment mania there will always be a forgotten few whose rationality in the face of market insanity is either ridiculed or ignored. This brings us to consider bond markets today.
As at the end of April, it was estimated that 30% of all government debt in the eurozone – amounting to some €2trn (£1.4trn), or roughly a quarter of that outstanding – was offering a negative yield.
In these instances investors have to effectively pay the government for the privilege of lending money to them. Consequently, a purchase of the prevailing two-year German government bond at the end of April, held for its full life, would have returned -0.23% per annum.
Lending to Germany is one thing, but at the time 17% of all Spanish government bonds were also trading at a negative interest rate and while Spain may not be an economic basket case, neither is it the bastion of economic virtue that Germany is assumed to be.
One of the many implications of this wave of negative yields is that mortgage rates are now negative in Denmark and, in some cases, the bank is now actually paying interest to the mortgage holder.
Bubble trouble
Has the world gone completely mad?
Let us not forget that the paint has hardly dried on the eurozone crisis. Indeed, given Greece’s precarious membership, we could yet be due for a second coat. Is this a bubble in the making or, this time, are things really different?
