The Craze of Cheap Money
Pfäffikon SZ, Switzerland – The global struggle to incite inflation is increasingly taking shape. Following the ECB’s lead, the Bank of Japan recently introduced negative interest rates on its deposit accounts. The Dutch state meanwhile makes a profit on its debt. In Switzerland negative interest rates have been commonplace for some time. The result is that citizens are being driven into making financial decisions for which they can barely estimate the consequences. The craze of cheap money is at the end of its 75 year cycle.
Blessing
Cheap money seems like a blessing. The fiduciary homeowner can’t wait to buy an even more expensive apartment in Zurich or Amsterdam. Whipped up by the cheap money and panting real estate agents he sits proudly in his little house while having no idea of the financial times in which he finds himself. His simple calculation teaches him that the mortgage installments have decreased in size and that keeps him happy. Unbeknownst to him, his exposure in the real estate market is akin to a capsized ship, but no one is going to tell him that.
Time Bomb
On the other side of the spectrum the investor is also at a loss. His bond portfolio looks safe but is a silent, ticking time bomb. In addition, he is forced to come up with negative interest rate payments on his deposit. The pension fund manager is tasked with the impossible assignment of squeezing a rate of return out of your rainy day savings. However, that has become an almost impossible task in the zero interest rate environment. The result is that the premium gets increased or that one needs to work for a longer period of time.
Cheap money has mainly resulted in too many citizens borrowing too much money without being aware of it at all. Some governments stimulate – whether consciously or not – this insane system. This is the reason that some investment criteria have been structurally overestimated. Because the notion of time has disappeared among many investors and homeowners their price conscious actions are based in quicksand.
End of The Cycle
According to Ray Dalio – one of the most successful fund managers in recent history – the super debt cycle is standing on its last legs. It has simply become impossible to make debt even cheaper. Realizing extra growth by whipping up extra debt has become a dead-end street. The yield difference of a bond in comparison to that of a deposit has never been this small. According to Dalio we’re at the eve of the end of the super debt cycle.
It goes without saying that at the end of every cycle there are many accidents that unfold. Since 2007 I have held that the debt cycle has been near its end. If Dalio is right, various groups will be hit hard. Certain investors will need to change course as well. The cheap money craze in combination with excessive debt is in the last phase of its cycle. All the more reason to prepare yourself accordingly, before it’s too late.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
