The Port of Melbourne and a $45 billion spending spree show us just what the future looks like…
If you want to know what the future looks like, the were two events last week that gave us a very clear picture.
And it’s not that pretty.
These two events were kind of huge, but kind of a side-show to the ‘real’ news about something blah blah blah who cares.
The first is the sale of the lease on the Port of Melbourne.
The Victorian government managed to secure $9.7bn, with the first 15 years of licensing fees up front. This figure came in well above expectations, and is what is known in financial circles as “a shitcan of money.”
The really interesting story for me though is WHO bought it. It wasn’t a shipping and logistics company. Rather, it was a consortium of pension funds.
The consortium called itself the Lonsdsale Consortium. (I presume because they’d all go the gym and lift big weights together, bruh.) It was made up of the Future Fund, Queensland QIC, Global Infrastructure Partners and the Ontario Municipal Employees Retirement System.
What an odd bunch. How do you even put a consortium like that together?
But these pension funds are united in a common cause – or at least a common problem – long-tail liabilities.
Long-tail liabilities are like the long-tailed southern bilby, expect that they’re not a marsupial, and the long-tail refers to time. Pension funds have obligations to deliver payouts 30+ years down the track.
(Just like a bilby.)
The Port of Melbourne gives them a way to do that. Unless Melbourne collapses into the sea, the port will provide a steady and consistent income stream.
These days, deals like that are getting harder and harder to come by. Each time the world threatens to rehash the global financial crisis, pension and investment funds rush to the safest thing they can find.
So maybe that’s gold for a while. But there’s still that long-tailed liability nibbling at their socks. It’s not enough to simply sit on their money. They need to earn a return, otherwise their members are going to get pissy.
And so they’d buy up nice safe things like government bonds, but they’ve been buying so much of them lately that now governments don’t have to offer much of a return. Most don’t even keep pace with inflation.
So a port in a major city offering reliable, inflation beating returns is a God-send.
Which is why they were willing to pay through the nose for it. And they were willing to pay a price that no ordinary company would have. The hurdle rates involved would mean that no logistics or transport company (the kind of companies that used to own ports) couldn’t even get close to this kind of price.
Whatever it takes to keep the bilby from the door.
The other reason that they’re able to pay these kinds of rates is because, in line with falling returns, their real cost of capital has also fallen.
In fact, for the big players, money is almost free these days.
That brings me to the other piece of news that happened last week.
The ECB effectively just gave away 45 billion euros. Just like that.
The European Central Bank handed 45.3 billion euros to euro-area lenders at a zero interest rate, in the second round of its program to boost credit to the real economy.
The take-up in the targeted longer-term refinancing operation, known as TLTRO-II, compares with a net 31 billion euros at the last operation in June, when Spanish and Italian banks were the biggest participants. The cost of the four-year loans could drop as low as the deposit rate of minus 0.4 percent if the banks expand credit supply, meaning the ECB would be paying financial institutions to take its cash.
The program, which allows banks to borrow according to the volume of loans they issue to companies and households, is part of the ECB’s push to boost euro-area lending and help spur economic growth and inflation
Just 30 billion here, 45 billion there. And paying the banks to take its money!?!? Are we for real?
It shows you just how far we’ve come that nobody blinks an eyelid at this anymore.
But this is what’s going on. The ECB pumps free money into he banks. The banks lend it out for fraction more than sweet F.A (another technical term). And then the big pensions and hedge funds buy ports and so on.
And the money goes round and round.
This is the way of the world now. And there’s two assumptions here. One, that the effective cost of capital is staying at zero, and two, there’s nothing much else worth investing in.
And by that I mean, the pension funds don’t think that they can rely on ‘economic growth’ anymore. In the past, as the economy grew, companies made money, and if you owned shares in a bunch of companies, then you made money.
But that’s not how the world works anymore. Now the money is free, there’s nothing really worth investing in, so companies sit on their hands and bid up their share-prices with share buy-backs.
As far as the pension funds are concerned, the systems broken. They can’t back the economy anymore, they’ve got to actually go out and buy income streams like the Port of Melbourne…
… at whatever the cost.
There’s a deep and dark pessimism at the heart of all this.
Are they too ‘glass half empty’?