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Ooh La La

Ooh La La

Few brands and their associated logos are as iconic as Louis Vuitton. Nearly as recognizable as Coca-Cola’s logo worldwide, Louis Vuitton is synonymous with global luxury.

All things luxury command a premium and Louis Vuitton loves to charge a premium. They are a brilliant company, their customers pay them exorbitant prices to market for them! It only makes sense that this same company would figure out how to get its investors to pay them money to borrow money.

This year Louis Vuitton, or more specifically the parent company LVMH Moet Hennessy Louis Vuitton SE, has created a new standard in financial luxury and customers are truly paying a premium!

The company has borrowed money at negative interest rates. Every time the phrase “borrowed at negative interest rates” is used in our office we get sick to our stomachs. Borrowing at negative interest rates means that the borrower is getting paid to borrow money and the lender is agreeing upfront to lose money. This is totally insane!!! We can thank the European Central Bank for this nonsense. They have restarted their 189 billion euro Corporate Sector Purchasing Program. LVMH’s recent acquisition of Tiffany was in part-financed by the ECB. How many merger & acquisition hedge funds saw that one coming? More importantly, how is this not considered a Ponzi scheme?

The ECB and European pension funds are buying up anything not nailed down and they do not care what the price on offer is. Case in point, ten years ago 10yr Greek bonds yielded 35%. Five years ago 10yr Greek bonds yielded 15% and even a year ago they still yielded almost 5%. Today, however, 10yr Greek bonds yield 0.97%. You can lend the fiscally conservative government of Greece money for the next decade and they will kindly reward you with less than 1% per annum. Yes that’s sarcasm in our tone.

These market conditions worry us because they are completely unnatural. The intervention of global central banks has completely distorted risk. Investors are desperate for yield anywhere they can get it and they are chasing anything with a return.

We have to admit that the writing has been on the wall for quite some time. Former Fed Chairwoman Janet Yellen had said back in 2016 she could see a case for the Federal Reserve to buy corporate bonds and even add stocks. Central banks like the Bank of Japan and the Swiss National Bank have been buying equities already for several years. This year the BOJ is forecast to be the largest shareholder of Japanese equities. This is all a scam of epic proportions that will end terribly. The question is where does this all stop?

We think it stops when the price of food skyrockets and inflation kicks in with a vengeance. Many commodity prices are at historic lows vs equities and central bankers seem to have amnesia when it comes to inflation due to their obsession with preventing deflation. Things can change quickly though. For example, rice prices are up over 36% in the last 12 months. Rice is the main food source globally and such a large price increase has very real-world implications. The Arab Spring was the result of food inflation in Tunisia. Food inflation is highly destabilizing, especially in emerging and frontier markets.

We can’t predict when the madness will end but when fixed income markets start defying the most basic laws of finance and allow borrowers to get paid for borrowing then you know the end is near.

As the French proverb chassez le naturel, il revient au galop reminds us if we chase away the natural it returns at a gallop.

Markets are about to gallop so have your Louis Vuitton sneakers ready. You will need to run.