Then, for good measure, we can add a dose of yield curve inversion in the US, a phenomenon that has been followed by a recession every time in the past 60 years - with only one exception in the late 1960s. Altogether, this makes for a high-risk economic and political cocktail. Yet, notwithstanding this, markets have pushed into territory of crazy valuations and perverse investment activity.
Take Denmark’s Jyske Bank, which recently launched the world’s first negative interest rate mortgage - offering home loans at minus 0.5percent a year on a 10-year mortgage. Negative interest rates effectively mean that a bank pays you to take their money. Over the life of the loan, you pay back less than you borrowed.
The insanity of “upside-down banking” had spread from bond markets where, recently, Germany sold the world’s first 30-year bond offering a zero coupon. The German bond was issued on an effective yield of minus 0.2 percent, meaning investors are guaranteed to lose money on the 30-year investment. In total, about half of all European government bonds have a negative yield, and globally there is $15 trillion (R221.53trln) in negative-yield debt.
Equity markets also have produced some astounding valuations, seen in profitless initial public offerings (IPOs). Loss-making Uber came to market at a share price of $45 in May, valuing it at $82 billion, or seven times its annual revenue. The global average for all businesses is less than two times revenue. When valuations get carried away - whether bonds, equities, tech or tulips - it never ends well. Yet, investment decisions have become heavily distracted by breathless storytelling of new business models, disruptive technologies and quantitative easing, leading to lofty valuations.