Investors want yield. Many will take on quite a degree of risk to earn it. But yield has become difficult to find over the last five to eight years and there is every prospect that it will remain elusive for the foreseeable future. Are we mired in a never-ending low yield out-look?
To a large extent, the low yield environment has been deliberately generated by central bank policy in most countries. Faced with the prospect of a recession after the the sub-prime financial crisis, including the collapse of some banks, US and UK central bank policy engineered a reduction in interest rates by creating cheap easy money (in effect, printing banknotes) as a matter of priority. On top of that, fiscal expenditure programmes were instituted in haste, a course of action followed in Australia to the ludicrous extent of the Government mailing $900 cheques to citizens (including dead ones, of course). The end result has been budget deterioration, increased public debt and, crucially, a distortion in the structure of interest rates in the market and the delay in cleaning out bad investment projects.Continue reading