Winnie Says, Pooh!

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair. We had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way…

- Charles Dickens, A Tale of Two Cities

What is clear to me, in our present moment in the financial markets, is that we are in two spaces at once. For borrowers, we are in the "season of light" with borrowing costs being the best in decades, a "Borrower's Paradise." This is especially true because we are not in any sort of Recession. Economic data, and some earnings are down, yes, but we are far from caving in.

For some borrowers, who are getting money at negative yields, they are in the best position ever - that would be "Ever" in the thousands of years of recorded history. The world currently has $17 trillion in negatively yielding debt. You can thank Japan and Switzerland and especially the ECB for this and in the EU, after Mr. Draghi's recent comments, there is no immediate end in sight.

Who ever imagined that lenders would pay borrowers for the privilege of handing them money? If someone would have previously suggested that this phenomenon would take place the rest of us would have thought him bonkers, or drunk, or incredibly high on some unknown substance. Yet, here we are, and the world has gone topsy-turvy and it's "Money for Nothing," and not just a song on MTV.

You may wonder what is causing all of this and I will tell you. It is the nations of the European Union. Yes, the Bank of Japan has a balance sheet larger than the country of Japan. Yes, the Swiss National Bank has manipulated it debt market so that they have the lowest yields in the world. However, they are just small pieces of the pie and it is the governments of the EU that are instructing the European Central Bank to print money, from nothing but "Pixie Dust," and then buy their sovereign and corporate debt so that the vast majority of the debt across the Eurozone now has a "Minus Sign," in front of the yield.

I am not lost, for I know where I am. But however, where I am may be lost.

- Winnie the Pooh

With America's 2 year Treasury at 1.578%:

NATION TWO YEAR YIELD

Denmark -0.737%

Germany -0.681%

Netherlands -0.679%

France -0.641%

Spain -0.417%

Italy -0.228%

*Data according to Bloomberg

With the Fed lowering rates, without the Fed lowering rates, it is my opinion that American yields are heading lower as we are virtually the last man standing, of any major market, with positive yields. Talk to almost any international money manager and you will find that European money is rapidly finding its way across the Pond. Soon, there will be no positive yields left anywhere, except perhaps in the United States, depending upon the actions of the Fed.

Even in America, at present levels, you are just seeing the tip of the iceberg, in my estimation, of all sorts of new financing deals. Investment Grade or High Yield and everyone is beginning to gear up to re-finance, tender, re-negotiate bank loans, call what can be called, as we have entered a "Borrower's Paradise."

This is also a boom time for individual borrowers as mortgage rates drop, equity loans fall, margin rates decline, and Nirvana is raining down from Heaven. With the Fed likely to do a "something" once again at their next meeting, this experience will likely widen and continue as will the growth in the size of their balance sheet which they will blame upon liquidity, which is only part of the story, in my view. They have to counter-balance the ECB to protect American interests and so they will, in my opinion.

It is Pooh's one hundred acre wood turned lopsided!

For fixed-income investors, we are in the "season of darkness" with no yields, or negative yields, fanned out across the planet and the cries for, "Help," have only just begun, in my estimation. The "Boom" for borrowers is the "Bust" for those that live off of their cash flows. This includes retirees, seniors, insurance companies, money managers, banks, mortgage companies, and any other individuals, or corporations, that live off of their incomes.

In fact, we are witnessing a very quiet re-allocation of assets now. Many insurance companies just cannot afford to buy bonds in the public markets, at present levels, and so everyone is scrambling to find alternatives. There is a huge march now to find private deals, of any sort, that pay yields that exceed the costs of these companies.

In the first instance lower yields will be helpful for the equity markets, and the Real Estate markets but, as we approach zero yields, lower rates won't move the needle anymore and then I expect either a stand-still, the better alternative, or a reversal, which could be painful, in these markets. There is also a price, to be paid, that I foresee coming in the currency markets, as the negatively yielding debt finally wakes up people to the realities of various economies. "Currency Wars" are on the way, in my view, and it will be a global event as the United States and the EU and China scramble for position. It is an accident just waiting to happen.

They're funny things, accidents. You never have them till you're having them.

- The Bear

Editor's Note:

The summary bullets for this article were chosen by Seeking Alpha editors.