Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Murray Rothbard would be turning in his grave. The American economist wrote in his 1983 book 'The Mystery of Banking' that central bank intervention was often disastrous. Whether the latest round of stimulus, which has generated a slew of negative rates globally, will end badly is yet to be seen, but it's already turned the most basic investment concepts on their head.

Companies are getting paid by banks for swaps, or locking in costs they would normally have to pay a premium for to hedge against market swings. Swaps used to be one of lenders' most profitable businesses. At the same time, as more than $8 trillion of government securities yield less than zero, investors are buying the debt with one eye on the returns they can get from their price appreciation. On the other hand, owning stocks for their dividend has never been better, so investors are snapping up shares to get a regular handout.

Messed Up
Buying Germany's 0.5 percent 10-year bond in January would've returned the best capital gain. The highest yield would have been from investing in the European Stoxx 600 equity index
Source: Bloomberg

If the zero-rate policy has turned investment concepts upside down, it's also creating a much too easy and perverse incentive for chief financial officers to juice shareholder returns with borrowed money. Since Europe introduced the world to negative rates in 2014, companies on the S&P 500 have jacked up dividend payouts while increasing debt versus their operational profits.

Borrowing to Pay
Since January 2014, companies in the S&P 500 have increased their debt as they raised dividends
Source: Bloomberg
*Values indexed to Jan. 3 2014 for comparability.

Traditional finance says that eventually such a strategy will become unsustainable. Yields can only go so negative, so at some point, capital gains from bonds will be capped as well. After all, debentures can't grow their businesses like real companies can.

But traditional finance assumptions have been thrown out the window. Whether that will result in a disaster like the one Rothbard predicted will take a few years to find out. For now, thanks to central banks, investors can buy stocks for yield and bonds for capital gains.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net