With ultra-loose monetary policy coming to an end, it is best to tread carefull
IN HIS classic, “The Intelligent Investor”, first published in 1949, Benjamin Graham, a Wall Street sage, distilled what he called his secret of sound investment into three words: “margin of safety”. The price paid for a stock or a bond should allow for human error, bad luck or, indeed, many things going wrong at once. In a troubled world of trade tiffs and nuclear braggadocio, such advice should be especially worth heeding. Yet rarely have so many asset classes—from stocks to bonds to property to bitcoins—exhibited such a sense of invulnerability.
.. Rarely have creditors demanded so little insurance against default, even on the riskiest “junk” bonds. And rarely have property prices around the world towered so high. American house prices have bounced back since the financial crisis and are above their long-term average relative to rents.
.. If today’s asset prices have been propped up by central-bank largesse, its end could prompt a big correction. Second, signs are appearing that fund managers, desperate for higher yields, are becoming increasingly incautious. Consider, for instance, investors’ recent willingness to buy Eurobonds issued by Iraq, Ukraine and Egypt at yields of around 7%.
.. But look carefully at the broader picture, and there is some logic to the ongoing rise in asset prices. In part it is a response to an improving world economy.
.. A widespread concern is that the Fed and its peers have grossly distorted bond markets and, by extension, the price of all assets. Warren Buffett, the most famous disciple of Ben Graham, said this week that stocks would look cheap in three years’ time if interest rates were one percentage-point higher, but not if they were three percentage points higher.
.. But if interest rates and bond yields were unjustifiably low, inflation would take off—and puzzlingly it hasn’t. This suggests that factors beyond the realm of monetary policy have been a bigger cause of low long-term rates. The most important is an increase in the desire to save, as ageing populations set aside a larger share of income for retirement. Just as the supply of saving has risen, demand for it has fallen. Stagnant wages and the lower price of investment goods mean companies are flush with cash.
When Will the Tech Bubble Burst?
The profitless start-ups that were wiped out in the dot-com crash have consolidated into an oligopoly composed of leading survivors such as Google and Apple. These are giants with real earnings, yet signs of a irrational euphoria are growing.
.. One is pitchmen bundling investments with very different outlooks into a single package. Last decade they bundled Brazil, Russia, India and China to sell as the BRICs. More recently they packaged Facebook, Amazon, Netflix and Google as FANG, then, as names and prospects shifted, subbed in Alphabet, Apple and Microsoft to make Faama. Others are hyping the hottest tech companies in China as BAT, for Baidu, Alibaba and Tencent. Whatever the mix, acronym mania is usually a sign of bubbly thinking.
.. Seven of the world’s 10 most valuable companies are in the tech sector, matching the late 1999 peak.
.. The dot-com era saw the rise of big companies that were building the nuts and bolts of the internet — including Dell, Microsoft, Cisco and Intel — and of start-ups that promised to tap its revolutionary potential. The current boom lacks a popular name because the innovations — from the internet of things to artificial intelligence and machine learning — are sprawling and hard to label. If there is a single thread, it is the expanding capacity to harness data, which the Alibaba founder, Jack Ma, calls the “electricity of the 21st century.”
.. the scale of today’s tech boom is not readily visible because much of the investment action has moved into the hands of big private players. In 1999, nearly 550 start-ups went public, and after many ended in disaster, the government tightened regulation of public companies. In part to avoid that red tape, this year only 11 tech companies have gone public. Many are raising money instead from venture capitalists or private equity funds. Venture capitalists have poured more than $60 billion into the technology sector every year for the past three years
.. “unicorns,” companies that haven’t gone public but are valued at $1 billion or more. Unicorns barely existed in 1999. Now there are more than 260 worldwide
.. We can never know when the end will come. Still, there are three critical signals to watch for.
- The first is regulation. The tech giants are seen today as monopolizing internet search and commerce, and they are angling to take over industries such as publishing and automobiles, raising alarms at antitrust agencies in Europe and the United States
- .. Going back to the “nifty 50” stocks of the 1960s, nearly every big market mania ended after central banks tightened monetary policy and many people who had borrowed to get in the game found themselves in trouble. The dot-com bubble peaked in 2000, after the Federal Reserve had increased interest rates multiple times.
- .. Finally, watch for tech earnings to start falling short of analyst forecasts. The dot-com boom was driven in part by increasingly optimistic predictions for technology company earnings
Canada’s Housing Boom Expected to Spark Rate Rise
In Canada, which was hit with an income shock after the downturn in prices of oil and other commodities, low rates have resulted in an extended period of loose money that has fueled a housing boom in pockets of the country.
.. even though inflation—at an annualized 1.3% rate in May—remains well below the central bank’s 2% target, and wage growth remains stubbornly low.
.. TD Securities, said it believed the central bank would hold off until October, arguing a rate rise now could hurt the Bank of Canada’s reputation as an inflation-targeting bank.
.. Six of the dealers surveyed added they expect Canada’s benchmark interest rate to hit 1% by the fall.
“Inflation isn’t pressing, but the economy is showing that it can easily live with interest rates a bit higher than they are at present and still generate solid growth,” said Avery Shenfeld, chief economist at CIBC World Markets.
.. Mr. Poloz said rate cuts delivered in 2015 have worked in helping the economy adjust to the income shock from lower energy prices, and that spare labor and production capacity in the economy was being “steadily” absorbed.
.. Mr. Shenfeld said one factor that may be driving the Bank of Canada is more concern about financial stability than it is letting on, highlighted by record levels of household debt and worries about a housing crash in Toronto and Vancouver.
“Why encourage excesses of debt?” he said. “We’ll trade off a bit of a delay in getting to 2% inflation if that gives sufficient benefits in financial stability.”
Debt-Ceiling Fights Make Government Borrowing Even More Expensive Than We Thought
A new paper suggests fights in 2011 and 2013 had ‘spillover effects’ to the entire market for U.S. government debt
The last two debt-limit fights on Capitol Hill, in 2011 and 2013, raised yields on Treasury securities regardless of their maturity by 0.04 and 0.08 percentage points, on average.. Treasury Department’s borrowing costs rose by about $260 million in the 2011 episode and $230 million in 2013