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We could ultimately see a “yield” of negative 50 basis points on the 10-year note, and corporate yields in the neighborhood of 1 percent for investment-grade corporate debt.”
In the Eye of the Storm, Guggenheim Oct 22nd


This week saw the RBA announce updated monetary policy settings, including its long-awaited entree into the world of “quantitative easing”.

The QE journey that the RBA is embarking upon is not The Road Less Travelled.

It is a path that has been worn smooth by the footsteps of the Bank of Japan, the ECB and the US Fed amongst others (in some cases over decades).

But there is a point in the path where it can only be traversed in one direction, the US being a classic example.

The US Government is now well on its way towards $30 trillion in debt, while at the same time running the printing presses day and night. All the while being unable to even hit its formal inflation target.

What that says is very simple: the US has passed a point of no return.

The moment they stopped borrowing and printing money the forces of deflation would overwhelm their balance sheet. (Their creditors would quickly realise that deflation means they will never be repaid in full, and they would then revisit the terms on which they are prepared to extend that credit. Given the quantum involved, there is no controlled descent under those circumstances).

So they will just keep kicking the can down the road, borrowing and printing ad infinitum. In the process driving the entire yield curve towards (and in many cases beyond) zero.

The Eye of The Storm

While we can expect a short term sugar hit (for direct equities and property in particular), in reality SMSF investors are being thrown under the macroeconomic bus by the RBA’s strategy, which favours full employment – and political expediency – over financial stability.

As per the Guggenheim article above:

  • The yields on cash and sovereign bonds will inevitably turn negative (to the extent that it is not already the case)
  • Investment grade corporate paper is headed to 1%
  • While the balance of the yield curve will struggle to breach 3%

However, no matter how painful, it should be acknowledged that negative yields are the least worst option here, because they represent a form of controlled descent.

Understanding Duration

It is important for investors to understand that there is no pathway back to the nominal returns of the past, for two reasons:

  • Our Zero Marginal Cost destination is – and always was – fixed (and it is that deflation which lies at the very heart of this entire narrative)
  • Regardless, in the case of long-dated / perpetual securities, reverting to those historical yields (from this point) would require that the existing stock of capital be vaporised


According to the most recent ATO statistics, just over 20% of SMSF assets are held in cash and TD’s.

With a one year Macquarie Bank term deposit now paying 55 basis points (a figure that has halved in just six months), an SMSF investor would need to deploy $100,000 of their retirement capital just to pay the median audit fee for their fund.

Given the RBA’s stated agenda, that figure can be expected to rise to $200,000 over the next 12 months.

I will leave subscribers to draw their own conclusions from the above.


Ashley Porter
Managing Director
Mclowd Pty Ltd