Investors are making a clear bet that the next few years will see financial repression — deliberate intervention to force the public and the corporate sector to lend money to the government at uneconomically low interest rates. This has happened before, notably in the years after World War II. In such conditions, equities can be relied on to beat bonds.
That doesn’t mean we should all feel comfortable about Uncle Sam forcing us to lend to him at rock-bottom rates. This isn’t a great basis on which to invest. As Bianco puts it: “Yield curve control is nothing more than price fixing. The Fed sets the price of interest rates and then uses its balance sheet in an unlimited fashion to keep interest rates at that level.”
.... A forcibly flat yield curve makes it very hard for banks to make money. And if banks aren’t making money, it grows harder for them to extend credit and fuel economic growth.
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