Financial illusions

Pfäffikon SZ, Switzerland – When you open the newspaper you will find only positive financial news. The central bankers have –eventually– managed to brainwash the masses. They’ve been doing so for over ten years, and the end is not yet in sight. Rising prices of shares and houses work as doping on the civil peace of mind. However, it is a misconception that increasing prices results in wealth.

Low yields
Overvaluation is indicated by low yields. Nobody can deny that hunting for yields has become a difficult story today. Your pension fund, your insurer, everyone is struggling with it. Some traders try to solve this by –temporarily– lending more. Also, nobody wants to acknowledge that returns need to be earned. A household earns a certain salary, and a family has to do everything with this amount. The family income must meet the obligations and liabilities incurred. However, a historically sound correlation of income and obligations is not there.

In the meantime, central bankers have been tinkering for decades to get the economy healthy. Whether it will be a sustainable success is the question, giving the demographic issue Europe is facing. An additional effect is that after such a long period of incentives, citizens will believe that this is the real world. Another effect is that increasing prices are giving a sense of wealth. That this sense of wealth is a financial illusion, Mr. Draghi does not tell. After all, the higher the price, the lower the return. If underlying cash flows do not attract, ultimately the price freeze. The central banker has pulled forward the returns, as it were, and holding investors a sausage for their noses.

Given the current conditions, it is not strange that the mass gets used to negative returns on cash and inflated prices of assets. Everyone seems to have forgotten that 2008 was a result of active policy by central bankers, and especially of the Fed. At the moment, we see a combination of offensive and historical exceptional overvaluation, with normal market conditions continuing to worsen. After studying financial history, my assessment is that the current overvaluation will not prove to be a sustainable solution for the citizen. In fact, the result will most likely turn out to an unexpected collective disappointment of unprecedented magnitude.

It remains for me to wish you a good weekend.

Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. 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 above mentioned shares and has no intention of doing so in the next 72 hours.