The Search For Yield Myth

This morning, on one of the speculation news programmes, I heard a pundit again talk about speculators being engaged in a search for yield.  Whether they actually believe that nonsense I don't know, but that it is nonsense, is beyond doubt.

If speculators really were engaged in a search for yield, then we would not have such a large proportion of assets, across the globe, with negative yields, and most assets, now, with negative real yields, i.e. after inflation.  If speculators were actually in search of yield, then they would not be speculators at all.  They would become investors in the true sense, using their money as money-capital to buy productive capital, so as to engage in the production of goods and services, to produce profits, which currently offers an actual real yield (the annual rate of profit) of around 30%.

But, they don't do that, for several reasons.  Firstly, engaging in the actual production of goods and services, as a private capitalist, requires work, and speculators have become accustomed, over the last century, of not needing to do any work, even the work of superintendence over the labour process.  Secondly, it involves risk.  The average annual rate of profit is precisely that, an average, and not guaranteed to each individual capital.  So, 30% looks attractive compared to actually paying other people to borrow your money, as they do now, but then you might make a loss rather than a profit, if you engage in actual production.

But, the bigger problem is that speculators are not bothered about yield at all.  Whatever yields are available, they are so tiny, even when they are positive, as to be meaningless in absolute terms.  Banks are offering regular saver accounts, paying 0.50%, if you save up to £200 a month.  But, at the end of the year, having tucked away this £200 per month, the interest you get on the £2,400 is a measly £6.50!  Who would bother?  What speculators are concerned with is not yield but capital gains.  They put money into bonds, or shares, or property not in order to obtain a yield, but in the full expectation that, at the end of the year, the price of the assets they have bought will have risen by 20%.

The idiots who acted like lemmings in wasting money buying Gamestop, and who have done something similar with Bitcoin, have no interest in yield.  They are driven by greed for short term, large, speculative capital gains.  All of the big investment banks engaged in high frequency trading, often driven by AI, have no interest in yield  - they often hold assets for only fractions of a second! - but merely with making fractional capital gains per unit, on huge numbers of units bought and sold.

That is why we have seen property developments in London and other big cities that have remained empty from the moment they were completed.  The owners of these developments are not bothered about getting rents from them - which itself involves collection and management costs, maintenance expenses and so on - because they expect that simply by doing nothing, the price of the property will increase by 50%, and more within a few years of its development, providing them with a capital gain that dwarfs any potential measly yield they might have obtained from it.  And, they know that all such speculation has been essentially risk free, now, for the last few decades, because if the prices happened to fall, the central bank and the state steps in to bail out the speculators, and to buy up the assets so as to inflate their prices once more.

Eventually, such Ponzi Schemes collapse, because they are unsustainable.  The negative yields we see today are the result of previous collapses, and the extreme lengths that central banks and states have had to go to to establish the scheme once more.  But, negative yields, amidst the ridiculous claim that speculators are involved in a search for yield is simply a reflection of how surreal and unsustainable that situation has now become.  The huge levels of debt, and the much greater debt to come, as economies break out of the current lockouts, means that interest rates are set to rise sharply and burst all of these bubbles, in a spectacular manner.  The Keynesians who think it can all be handled by printing even more paper money tokens to finance that debt, are living in a fantasy land of magic money trees, which shows they have no understanding of either money, or value, or interest rates.

As I've pointed out in previous posts, inflation as well as interest rates is rising sharply across the globe.  Printing even more money tokens, at a time when the liquidity is necessarily going into actual circulation and consumption, rather than simply buying assets, will push up inflation, and interest rates even further.  Again, the presentation of the official inflation data is as much of a fiction as the idea that speculators are searching for yield.  The official inflation data shows the rise in prices of all those things that consumers currently can't buy, but leaves out the sharply rising prices of all those things they can buy!  A look at the surge in global primary product prices illustrates the point.

According to Bloomberg,

“Food prices are soaring faster than inflation and incomes”.

In the UK, according to an index compiled for the BBC, they have risen by 8.3% since January, while meat and fish are up by 22.3%.

The price of rhodium and palladium, as with other raw materials has soared. These are used in catalytic converters, leading to a renewal of the practice of stealing them for the metal that was seen some years ago, when metals prices rose sharply. In fact, someone has set up a Twitter account dedicated to showing CCTV footage of such thefts. Then there is the sharp rise in the price of semiconductors used increasingly in every consumer durable from toasters to cars.

We are seeing inflation rising sharply, hidden by indices that are measuring everything other than the actual rises in prices, and, at the same time, we are seeing governments proposing increasing aggregate demand by trillions of dollars as a result of infrastructure spending, and direct payments of cash to households and businesses.  As they see interest rates rising, as all of this leads to households and businesses increasing their own borrowing, the former as they engage on a splurge of buying all those things, like cars they couldn't buy over the last year - especially as they see the price of them rising rapidly, and seek to get in, before prices rise further - and the latter to be able to expand their production so as to meet all of this rising demand, then states will respond as they have whenever interest rates have risen over the last thirty years - they will print even more money tokens.  But, now that will simply increase inflation even faster, and push interest rates even higher!

The irony is that what this will mean is that the higher interest rates will burst all of the speculative bubbles, and the higher interest rates will then make it possible to actually search for yield, rather than gamble on making capital gains, but, as all of the excess liquidity causes inflation to rise ever faster, the higher nominal yields will increasingly fall behind inflation causing real yields to fall.  In Britain, Brexit, and the higher costs it brings with it, will put this process on steroids.