Universal Love TRTT Part 9: Eat my ass you absolute man child

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Papa G

Brownlow Medallist
Apr 13, 2006
22,107
40,772
The Bitter End
AFL Club
Port Adelaide
The absolute lack of monetary policy levers the world can pull when things eventually go tits up is frightening. This is why I back our government to build the biggest surplus possible. The bubble in the equities market and increasing the property market simply because there is nowhere else to make money is a huge cause for concern.

Everyone likes to kick the banks and insurance companies, but the points he makes about the credit spread squeeze effecting banks ability to make money as well as insurance companies (who are mandated to invest in conservative low risk investments) are also a cause for major concern. Despite the "Stick it to the man" popular attitude that pervades, the collapse of these institutions is not a good thing.

He lost me a bit when he went down the path of hyperbolic stating that basically you are completely marginalised in the US if you aren't a white male, which will lead to to Civil War, but in general he does make a lot of sense. The fact he's a leading fund manager saying this (when usually it is in their interests to talk everything up) is also unsettling.
 

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Janus

Dominus Ex Machina
Sep 9, 2007
20,571
50,542
Portland, Oregon
AFL Club
Port Adelaide
Other Teams
Dallas Cowboys, Chicago Bulls
The absolute lack of monetary policy levers the world can pull when things eventually go tits up is frightening. This is why I back our government to build the biggest surplus possible. The bubble in the equities market and increasing the property market simply because there is nowhere else to make money is a huge cause for concern.

Everyone likes to kick the banks and insurance companies, but the points he makes about the credit spread squeeze effecting banks ability to make money as well as insurance companies (who are mandated to invest in conservative low risk investments) are also a cause for major concern. Despite the "Stick it to the man" popular attitude that pervades, the collapse of these institutions is not a good thing.

He lost me a bit when he went down the path of hyperbolic stating that basically you are completely marginalised in the US if you aren't a white male, which will lead to to Civil War, but in general he does make a lot of sense. The fact he's a leading fund manager saying this (when usually it is in their interests to talk everything up) is also unsettling.
I'm not sure there's a bubble in equities - P/E ratios are inflated but not the ridiculous shit that you saw with tech stock back in 2000, where the P/E ratio of the Nasdaq Composite was 200...dwarfing the P/E ratio of 80 that the Nikkei 225 reached in the asset price bubble of 1991 (when the Japanese economy was hyper-inflated). Sure, they are overvalued but it's more speculation about what those companies could release in the future (such as AI).

The reason why the the bonds market failing is an issue is because bonds are basically the faith people have in a particular government to service its obligations. They are the equities of a sovereign nation.

Why is there no faith in the government? Because of the massive liabilities that are owed by helping people who are over 60 that spend most of their time in hospital and popping pills trying to preserve their quality of life through operations etc (not that this is a bad thing, it's just that someone has to pay for it). 33% of Japan's population is over 60. 28% of Germany's population is over 60 and is expected to be 37.6% in 30 years. UK, it's 25.3%. So in those three countries, 2-3 people work to support 1 person. In Australia, 17% of the population are over 65, so it's more like 5 people work to support 1 person, which isn't too bad...but just like the US, we won't have the funds available to pay social security costs in the next few years, because as the ageing population grows and they start withdrawing funding instead of contributing to it, the people who are contributing to it won't be able to make up for the short fall.

But here's the catch 22: the reason why they can't meet the shortfall is because the bond yields are down! Governments pay for their debt by investing in other countries through bonds because they are considered safe. They invest in AAA or maybe AA countries - but they are only good investments if the bond yield is greater than the current cash rate (i.e their money is valued highly enough to make the investment worthwhile). Which leaves the following countries:

Australia (AAA): 0.75% cash rate, 1.078% bond yield
Singapore (AAA): 1.64% cash rate, 1.768% bond yield
Sweden (AAA): -0.25% cash rate, 0.020% bond yield

South Korea (AA): 1.25% cash rate, 1.737% bond yield
New Zealand (AA): 1% cash rate, 1.38% bond yield

Israel (AA-): 0.25% cash rate, 0.802% bond yield

That's it. That's all the countries in the world where investors believe the economic forecast is good. The US (AA+) sits at 1.75% cash rate to 1.716% bond yield, so they are close...but when Trump says that the Federal Reserve made bone headed decisions by raising interest rates too quickly, he's absolutely right. The US interest rate should be 25 basis points lower than where it currently sits (1.5% as opposed to 1.75%), which means that the US dollar should be somewhere in the vicinity of 1.25-1.30 AUD...not the 1.46 it's currently trading at, which kills exports from the US and makes it impossible to service their debt obligations.

“We’ll have to see if this will hold up on a 5% to 7% correction. I kind of have my doubts,” Bianco said on CNBC’s “Trading Nation” on Monday, a day that saw the markets close lower. “The markets [are] looking for one cut maybe next year. I wouldn’t be surprised if it winds up being two or three once all is said and done.

The world economy is like a finely tuned watch that's running down. Something has to give.
 

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