Would you lend money to this man?

Would you lend money to this man?  For 50 years?  At a rate below 2%?  Macro Man wouldn't, but on yesterday's evidence there are plenty of people who would (and did).  France sold 3 billion 50 year OATs at 1.91% (and a further 6 billion 30 years at the princely yield of 1.31%.)

To put that in perspective, the average level of French CPI over the last 50 years was 4.4%.   Now maybe you could argue that much of that occurred when the FRF was free floating (and inflationary); since the advent of the euro, French CPI has averaged 1.44%.  Should that performance be repeated over the next three to five decades, those 30 and 50 year bonds confer real interest rates of -0.13% and 0.47%, respectively.  Colour Macro Man distinctly unenthused.

Although there is no time series for French 50y yields that Macro Man is aware of, there is one for 30y's....and unsurprisingly current levels are near all time lows in both nominal and real terms.

Moreover, 30 year yields are comfortably below nominal GDP, which is an historical anomaly.  Stop me if you've hear that one before....

Finally, much like elsewhere, equities offer a substantially higher yield than long rates; the dividend yield of the CAC is 200 bps higher than what you get from lending to M. Hollande for the next 30 years.   True, in many ways European equities are as attractive as a pile of dog vomit in the middle of an antique Persian rug, and it's a short trip from "value" to "value trap."   One is left to wonder, however, how big the yield gap needs to be to draw in buyers.

It's important to remember, of course, that it's difficult (and generally unprofitable) to look at an asset price in a vacuum and say "that's wrong" and go the other way.   It seems reasonable to posit that the buyers of French '66's at sub 2% think the price is just as crazy as your author does....but if every other bond price is just as crazy, then there's an argument that you just pick the one with the highest yield where you're pretty sure you'll get your money back.

As many readers likely heard, the average yield on the entire spectrum of German government bonds reached zero on Monday before retreating slightly to 5 bps yesterday.  Perhaps it's a coincidence that Wolfgang Schaeuble launched a blistering attack on the ECB over the weekend...but probably not.  (Incidentally, is there much in the way of crowd-funding platforms in the Eurozone these days?   That could be a way of dis-intermediating crippled banks and financial repressimos and getting access to capital and yield to those who need them.)

Taking a step back, there is an ironic aspect to all of this.  Central banks across the developed world are keen to generate inflation (usually defined as a 2% annual rise in some usually-arbitrary index), largely because of the enormous stock of debt that the world has accumulated over the past few decades.  The solution to the problem has been....to dramatically increase the value of the very liabilities that are such a problem in the first place.  Macro Man cannot help but think that economic historians will shake their heads in future centuries when they read about this whole sordid situation.

Meanwhile, central banks can content themselves with the knowledge that they've laid the foundation for the next crisis.  By mispricing the cost of capital, for example, the Fed has encouraged a debt 'n' buyback binge that has left corporate America with the sort of cash flow issues that one normally associates with Greece, as the chart from SocGen below illustrates.

While the end needn't come imminently, by the same token it isn't necessarily far away, either.  Either way, when it comes, M. Hollande won't be the only chap you'll not want to lend money to.