On Markets, And The Impending Apocalypse

I was speaking to a City fund manager the other day, someone paid considerable amounts more than me to look after my and your money. He was baffled over where these markets are going, and why they are where they are.

The geopolitical situation is as bad as it has been since the Berlin Wall came down. Ukraine is not resolved, the Middle East and North Africa could continue as they have been for the past five years, in complete chaos, for another two or three decades, with who knows what consequences. Then there is China/Hong Kong.

The markets, which should respond to all this, seem oblivious. This is because, we concluded, after five years of near-nil interest rates there is nowhere else to put your savings and get any sort of income. The markets are ignoring the prospects of a serious crash because they are awash with funds that can go nowhere else.

There is another related point. Investors, banks and other financial institutions that are meant to be clever and canny, are still happy to lend money to governments for no return or a negative one. The UK, the Spanish and the French have recently offered government bonds at negligible rates of interest – in the case of the French, with the catastrophe that is their economy, with a slight but real prospect that a future government will renege on those borrowings and never pay the money back.

There are two possible reasons for this. One is that the banks are themselves terrified of some market crash, probably triggered by one of those geopolitical events, and are instead doing the equivalent of stuffing their money under the mattress, putting it into government bonds that, notwithstanding my remarks about the French, are seen as a safe haven.

They would rather do that, and see the value of their funds eroded year on year by inflation, than risk the stock market and the returns available there

The second alternative is that they are taking a longer term view and believe there is no point in investing in business, whether in equities or by means of corporate loans, because the world economy is entering an extended period of stagnation and deflation, and the returns from government bonds, though negative, might over the next decades turn out to be more attractive.

So if I am right, you have three potential pools of investors. One is prepared to ignore the risk of market collapse because they have no better options. Another thinks that the Apocalypse is looming, in investment terms, and wants to protect its funds even if this means a negative return.

A third thinks the world is going nowhere and economic growth will go into reverse long-term. As someone paid to worry about this sort of thing, I find it all rather worrying.

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On Portuguese Bonds

For those who do not pay as much attention to international bond markets as they perhaps might, something odd is happening in the Eurozone. Three of the real basket cases, Greece, Ireland and Portugal, have all in recent weeks issued bonds at startlingly low interest rates.

This, for the uninitiated, means banks and other investors are prepared to lend them money at favourable rates again. It is not entirely clear why, and frankly, it is a little worrying. We have rather taken our eye off the Eurozone crisis, what with Ukraine and the rest. But the intrinsic problems there have not gone away, and by some measures are increasing.

I talk to executives every day who do business there, and they say prospects are at best mixed. Germany, the strong man of Europe, is doing well enough. France is a mess, and not likely to get much better under the current administration. Holland flips in and out of recession. Confidence among employers everywhere is still low.

Yet hard-nosed investors seem prepared to treat those three above bond issuers as reasonably well functioning economies, where the risks of lending, and of those countries defaulting on their loans, are not significantly greater than in the UK or the US. This makes no sense.

As it happens, I was in Portugal last autumn, and believe me, that is not a place you would want to sink your life savings. Even in the prosperous bits, where we were staying, there are an astonishing number of derelict buildings which no one seems to have the cash or the confidence to buy up and restore.

The lasting image of my visit was a chain of uncompleted electricity pylons stretching across the countryside near to Faro, one of the biggest towns on the Algarve. Someone had obviously started the job and presumably then run out of money. They sat there, mute testimony to an economy wrecked by its adoption of the euro.

The Eurozone is not out of the woods yet, and it would be foolish to pretend it is.