Welcome to the great capitulation

People are still blaming central banks for imposing “artificially low” rates, which is kind of amazing and depressing. Artificially low compared to what? If central banks were engaged in excessive monetary easing, the results should be visible in the form of rising inflation – which was, in fact, what the critics of quantitative easing claimed would happen. But it didn’t, and now I have no idea what their criteria are for not-artificially low rates.

But why are returns so low – and why have they fallen so much this year?

A key point is that there is no indication this time around of a flight to safety, with investors demanding higher rates of return on riskier assets and plowing into safe assets. Nothing much is happening to spreads on riskier corporate bonds.

It’s also interesting that despite Brexit and all the talk about bank worries and friction over austerity within the euro area, spreads of riskier euro bonds against Germany have settled down.

So we don’t seem to be looking at a risk-off situation, with government bonds as a safe haven. What’s consistent with the data, instead, is the notion that investors are throwing in the towel and accepting secular stagnation as the new normal. Almost eight years after the collapse of Lehman Brothers, there is no sign of a really strong recovery anywhere, and perceived private sector investment opportunities remain weak. Stock and land prices are pretty high, but probably because of low discounting rather than expected high returns.

Call it the Great Capitulation.