The Pascometer has a good piece today on the global dash for trash:
It’s one thing for the central bankers’ central bank to warn of cheap money distorting the world’s markets, but it’s another for more comprehensible anecdotes to start adding up to the trillions. In short order:
- Last year a record US$477 billion worth of high-yield bonds were sold, but US$340 billion worth have been offloaded in just the first half of 2014.
- Dutch interest rates have never been lower, not in 500 years.
- Fuelled by cheap money, there are more American mergers and acquisitions underway than there were at the previous peak in the heady pre-GFC days of 2007.
- The Japanese government is lending trillions of yen to Japanese banks for almost nothing.
- The Australian mortgage securitisation business is back in full swing with second-tier banks able to get as much funding as they desire at record low rates.
- Spanish and Italian bonds have been trading on record low yields.
Funds manager Mike Mangan, in his newsletter for 2MG Asset Management clients, put this perspective on the unprecedented level of cheap money:
“Meteorologists (and insurers) speak of the 1 in a 100 year flood. But what is happening in western economies (and Japan) is not even close to a 1 in a 100 year event. It has not happened in centuries and I would argue human civilisation hasn’t experienced the sort of monetary conditions we now bear witness to, since the Bronze Age. How and when it all ends, no honest person knows. But I strongly suspect that when it ends, it will end badly.
And that’s only part of the list. A couple of points to add:
- of course it will end badly;
- yes, as badly as the GFC, and our banks will lose access to offshore credit again;
- Australia’s mortgage securitisers will be wiped out again (or be nationalised) And, BTW, they are not borrowing anywhere near record low rates. They’re raising money around 70bps over swap. Pre-GFC it was more like 10bps;
- it will be worse for Australia than the GFC as it will mark the genuine beginning of China going ex-growth and both monetary and fiscal policy have much less flexibility;
- I still see the end coming from either China, as its reform process slows growth inexorably, or from the US bubble bursting once more. GMO’s Jeremy Grantham reckons the free money cycle will run right through the 2016 Presidential election first. God help us if he’s right.
- no, it won’t end fiat currencies but you’ll sure want to hold some gold as fiscal and monetary madness reaches lunatic new levels.