Negative interest rates are unnaturally propping up the stock market and at some point the whole edifice will collapse. It's a popular theory, but history suggests it might be wrong.
According to Kasper Ahrndt Lorenzen, the chief investment officer of the 740 billion Danish kroner ($109 billion) pension fund PFA in Denmark, we're essentially living through the negative supply shock that came with the oil crises of the 1970s, but in reverse. Thanks to cheaper imports and better technology, the supply shock is now positive and it's going to continue shaping monetary policy far into the future, the theory goes.
"This is just a massive, positive supply shock, similar, though with a reverse sign, to the negative supply shock we saw in the 1970s," he said in an interview.
Back then, "we underestimated how bad returns were and how long it took to get rid of the oil crisis," he said. "Investors didn't really make any returns for 12 years over the '70s." Now, Mr. Lorenzen says he thinks "we generally underestimated the effect of this positive supply shock."
European stocks have roughly doubled in value since 2008.
"So the background I have in my head is that the positive supply shock has more to go," Mr. Lorenzen said. "We're not going to see inflation coming through."
If you accept that premise, then equities start to look reasonably priced, he said. "Equities aren't cheap, outright, but if you look at equities and equity valuations, relative to the interest rates, maybe it's not too bad."