EZ money is sloshing around the globe like never before, but it’s making the stock market look a little shaky to me. Property stands like a beacon of reality in this ‘unreal’ world.
The world is awash with easy money. From the US to Japan and across to Europe, governments are just pumping markets full of cash. But just how easy is this EZ money? And how do we get ourselves a piece?
Well, let’s take a look at some of Uncle Jon’s fun facts from the world of high finance.
For starters, in 2013, US$477 billion worth of high-yield bonds were sold – effectively pumping that much cash into the global economy. That was a new world record, but we’re on track to smash that record this year – we’ve already sold US$340 billion in the first six months alone.
If we keep up that pace, we’re losing at something like US$700 billion by Christmas.
And how big is that? Well, it’s something like the entire economy of Switzerland! It’s a whole other top 20 global economy, just pulled out of thin air, turned into cash, and pumped into the system.
And if you’re adding the equivalent of Switzerland to the global system every year, it’s going to have a big impact. And it’s going to have a big impact when you take it away.
And at the same time (and actually because of it), central banks are practically paying people to take money off them. Official interest rates are just a whisker above zero in Japan (have been for twenty years!) the US and Europe.
Those banks not on the EZ money main line can still enjoy the cheapest borrowing conditions the world has ever seen. And banks are sending it our way, with the cheapest borrowing rates on record.
We talk about the lowest official interest rates in 50 years here in Australia. In Holland, interest rates are also at the lowest levels in recorded history – and recorded history there goes back 500 years!
2MG Funds manager Mike Mangan, put it in perspective:
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.
Maybe it’s a big call to make. It’s hard to know exactly what the monetary policy settings of inter-glacial Mesopotamia were, but I reckon he’s probably right.
We’re right now still in the middle of the most interesting financial experiment in human history.
And that experiment is this – advanced economies are trying to starve off the wolves of deflation and economic collapse by throwing their printing presses into over-drive and, put simply, throwing money at the problem.
EZ money flying everywhere.
And with all this money flying around you’re probably wondering, how do I get in the way of some of it?
Well, unless you’re a bank, it’s probably not as easy as you’d like. Banks are first in line in the easy money gravy train. Government’s lend the banks money. Banks lend it to us (when they get around to it… if they want to…)
But the question that’s got the pointy-heads up all night is what kind of distortions does having all this cash just sloshing around the system create?
The big worry used to be inflation and hyper-inflation. Traditionally, when government’s let their printing presses run, the currency collapses and inflation careers out of control. The price of bread doubling every few days, even the same day – kinda thing.
But we haven’t seen that so far – because the printing presses are blowing money into a deflationary gale, and with recoveries only now looking like they’re gaining any traction, deflation seems to still remain a bigger threat than inflation or hyper-inflation every has been.
And how long can it go on? Well, Japan’s been at it for 20 years…
The other thing pointy-heads worry about is how it messes with the normal rewards and payoffs of economic activity.
For example, in the US, there are more mergers and acquisitions underway right now than there were at the previous peak in the heady pre-GFC days of 2007.
Why is that? Well when government’s and banks are practically giving money away, it makes sense for companies to borrow it and spend it on something… But what, though? If the economy is still struggling for life (and consumers aren’t spending) there’s no point investing in extra capacity and extra production. Who will buy it?
No. Far better to borrow to buy an existing company and gobble up their profits. And so the big fish are on a buying binge, and mergers and acquisitions are at record levels.
And all this buying activity bids up the prices of successful companies, and share prices rise. Indeed, one thing we know for sure is that EZ money has created a surge in the American stock market – here too probably, but not so extremely.
It all makes me a bit nervous, and makes me think the global share market is a bit frothy. If its success is built on a Switzerland of cash, and that Switzerland was created out of nothing, how ‘real’ and stable is it?
And could it all come crashing down?
No, that’s why my money’s still with bricks and mortar. Property is a step removed from this crazy global experiment (and actually stands to benefit from safe-haven flows if the whole show comes undone.)
If you’re watching the mega-rich and global elites, it’s where the smart money is. Always has been. Probably always will.