Whether it’s been prompted by his advancing age, the spectacle of history repeating itself, or his recent divorce, bond king Bill Gross has been in a philosophical mood of late. After last month’s existential poetry, Gross this month ruminates on happiness. He concludes that Donovan got it right when crooning, back when Gross was transitioning from the very un-Donovan world of the Vietnam-era Navy to the equally un-Donovan world of business school, that “happiness runs in a circular motion,” and then just runs and runs.
For years I thought that the gist of Donovan's phrase was the obvious - the "pay it forward" allusion that suggests what goes around, comes around - and it undoubtedly is. But there are hidden nuances, at least to me. The "running in a circular motion" also connotes a self-contained, inward-looking, self-satisfaction that equates happiness to being content with yourself as a person.
Unfortunately, other things run in a circular motion, too. Notably, “financial repression,” which is Gross’ happy phrase for central banks’ artificially keeping rates low while pumping up and preserving the “finance-based economy” with quantitative easing. You know, the thing he warned them against doing back in 2003.
Alas, no one listed to the bond king back then, and now we are doomed to running in circles until we can’t anymore.
A client asked me recently when the Fed or other central banks would ever be able to sell their assets back into the market. My answer was "NEVER". A $12 trillion global central bank balance sheet is PERMANENT - and growing at over $1 trillion a year, thanks to the ECB and the BOJ….
For now, investors must go with, indeed embrace this financial methadone QE fix. Quantitative easing will continue even though the dose may be reduced in future years. But while a methadone habit is far better than a heroin fix, it has created and will continue to create an unhealthy capitalistic equilibrium that one day must be reckoned with. Yields will likely gradually rise (watch 2.60% on the 10-year Treasury), yet they will stay artificially low due to the kindness of foreign central bank quantitative easing policies. But that is not a good thing. Happiness runs...Happiness runs, and so one day, will asset markets, artificially supported by quantitative easing.
Happiness Runs [Janus]