Doping
Pfäffikon SZ, Switzerland – Doping in sports is perennial and something that probably will never change. The naive outrage among athletes and supporters continues to amaze me. However, doping in the financial world is a different story. Entire generations are being raised with a policy of extremely low interest rates. They think that money is free, which is obviously a sign of utopia. More and more policymakers and investors have doubts about the monetary policy of the European Central Bank (ECB). The Bank of International Settlements (BIS), meanwhile, has issued warnings for the umpteenth time.
D-Day
Thursday was again D-Day for the President of the ECB, Mario Draghi. The ECB went one step further to boost the economy and inflation. Banks that want to borrow money from the ECB no longer have to pay interest; the interest rate has dropped to 0 percent. The interest rate to be paid by banks to park money at the ECB is even more expensive, i.e., -0.4 percent. Additionally, the ECB increased the bond buyback program to €80 billion, and there will be a new round of funding for banks. Draghi continues his psychological game to get it right, whatever it takes.
Tired
Meanwhile, investors are “doping tired.” Very slowly, investors are becoming convinced that the measures of central banks are not achieving results. Claudio Borio of the BIS is crystal clear on this: “Their confidence in the healing powers of the central bank, probably for the first time, begins to decrease. Policymakers would do well to take this to heart.” Apparently, the central bankers believe themselves no longer in their prescribed medication. Earlier, I have highlighted the fact that, according to several leading fund managers, the end of the super debt cycle is near. Now the confidence is further eroding in the Draghi’s of this world; we find more and more confirmation of this. There is also a demographic battle, which is an adversary of stature and has an extremely long process.
Naive
Investors in its broadest sense would be wise to take note of the final end of the debt supercycle. Don’t get misled by a Draghi or Yellen by entering into more debt just to serve them. Central bankers ultimately have a different agenda, which is not yours. The dramatic structure of pension funds is a good example to show us what an extremely low interest rate does with continuous capital accumulation. Doping in the world of money has far-reaching consequences, where many people will lose their financial naivety sooner or later. A healthy balance between fair value and debt will be decisive to cope this period. That this process will lead to negative surprises for many needs no further argument.
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.
