• Economy & Politics
  • Investing
  • Personal Finance
  • Related Posts

    The Next Round Of The Great Crisis Has Just Begun
    Central Banks Scramble To Stabilize Crashing Markets: China Fails, Switzerland Succeeds (For Now)
    Greek Contagion Spreads As Several Italian Bank Stocks Failed To Open
    Taking The Express Route To Profits In The Healthcare Sector
    One Stock Play For Two Growing Threats
    Jim Rogers: Gold Buying Opportunity Seen In “Next Year Or Two”
    If Uber, FedEx, Other Workers Are Employees, Who Pays What?
    Affordable Care Act Serves As Strong Tailwind For Healthcare REITs
    How To Invest Your Money In The Second Half Of 2015
    Impact Investing Goes Mainstream; Is It Time You Thought About It?
    In Just 17 Days, Chinese Stocks Have Lost The Value Of Spain’s Entire Stock Market
    The Secret Driver Behind One Of The Fastest-growing Online Lending Startups
    It’s Official: China’s Stocks Are Now In A Bear Market
    U.S. Market Reaction To Greece Crisis Is Critical
    Greece Crisis To Overshadow Jobs, Fed

    Beware The Great Central Bank Bubble

    I guess it all came to a head for me when I saw the story of the Thai billionaires.

    This pair has dropped about $27 billion in acquisitions this year. In April, one of them pulled together a $6.6 billion deal in a week.

    You can’t refinance a house in that kind of time.

    That’s when I realized this global central bank easing is starting to develop some very dangerous consequences.

    The U.S. Federal Reserve kicked off this money-printing frenzy to re-liquidate the very banks and financial institutions that started the whole mess. It then began to spread because no country wanted to see its banking system collapse.

    The last time that happened was during World War II, when the British handed over the global economy to the United States by pricing every major commodity in dollars. That meant every nation had to hold dollars to be in the global marketplace. The dollar became the world’s reserve currency.

    That was seriously challenged when the 2008 financial fiasco occurred. China, at that point, had managed to avoid the over-leveraging and derivatives shenanigans that the West had found so engaging.

    And its growth rate and internal demand was strong enough that there was a real sense that the country could de-couple from the West’s maelstrom and become the globe’s engine of growth moving forward.

    Close, But No Cigar

    Unfortunately for the Chinese, they missed by a hair.

    The West collapsed, and that had more of an effect on China than the nation anticipated. They started their wacky building programs to keep internal demand going to make up for the loss of outside business.

    But it got a bit out of hand.

    Meanwhile, the West has been pumping money like crazy into the pathetic institutions it felt compelled to save — for the good of all us little people, of course. And the institutions in their gratitude have made billions of dollars quarter after quarter and are still not rolling this money into the economy, where it was supposed to go.

    China’s challenge is the opposite. It’s deployed its money into the economy on massive building and infrastructure programs that have no real market demand yet.

    The Other Shoe

    The thing that really started to make this whole easy money thing scary was when Japan, the third largest single economy in the world, decided it was time to get in on easy money game with the United States and Europe.

    The Japanese have lived in a unique economic realm for almost 30 years. First, the citizens generally hold all their money domestically in Japanese postal accounts that are like retirement/savings accounts. Because interest rates are low to non-existent (as is inflation), there’s no real incentive to spend money. And since nearly all the nation’s debt is held internally, it has very low volatility since no one in interested in trading it.

    Well, trading it in a conventional way. Actually, the yen has become the world’s carry currency trading vehicle.

    Investopedia defines a carry currency trade like this:

    A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

    Here’s an example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let’s assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

    But now that the yen has been opened up, Japanese are going elsewhere for value and the yen is being traded for the first time in decades in the open markets.

    And the markets — both bond and stock — are going nuts.

    Back To The Thai Tycoons

    So the reason the Thai spending hit me was I realized that these barons of industry can get their hands on this cheap, easy money. I mean who else could borrow $6.6 billion in a week? Most small and medium-sized businesses can’t get loans in the United States — to expand.

    From there, it’s simply doing the math. The easy money is getting outside the financial institutions and into the hands of big, safe (a relative term to be sure) corporate types who are borrowing big at crazy low rates.

    Unfortunately, the blowback here is that rates are already ticking up in the United States. And that trend will follow everywhere else.

    And in that great unwinding, bonds — from Treasuries to junk — will be in for a reckoning that will make the real estate bubble look like a blip.

    Now, this may not come to fruition. But given the short-term myopia of those that drove us into the past financial imbroglios and the fact that we’ve rewarded them instead of punishing them, I’m betting they’ll be at the trough until the end. And anyone not clear of their greed will pay the price.

    — GS Early

    Discuss this Story:

    Comment Policy: We encourage open discussion. Comments including racist statements, profanity, name calling or spam will be removed at our discretion. We use filters for spam protection. If your comment does not appear it is likely because it violates the policy.

    Watch Out! Eight Stocks Ripe For A Big Fall
    Food Distributor Merger Off: Sysco Paying $300M Penalty
    U.S. Futures Fall As Greek Crisis Worsens
    Euro, Stock Futures Plunge On Greece Default Fears
    Indian Pharma’s Struggle To Tighten Standards Paves Way For M&A Deals
    Rising Interest Rates Pose New Risk For Banks
    Canada’s Oil Patch Confidence Crashes
    A Dangerous Combination: Bubbles And Debt
    Lululemon Recalling Dangerous Drawstrings On 318,000 Tops
    With The Energizer Split, What Will Edgewell Look Like?
    Grantham’s Bubble Gun Hasn’t Been Triggered
    Chinese Stocks See Sharp Declines Friday
    The Big Obamacare Winners Will Surprise You
    iPhones Hit With ‘Blue Screens Of Death’
    Google’s Autonomous ‘Pod’ Cars Hit The Road
    Consumer Financial Gripes Posted On Fed Site
    China Stock Swoon Could Signal End Of Bull Run
    Ailes Signs Multi-year Contract To Stay At Fox
    Health Care Sector Rises On Obamacare Ruling
    Futures Rise On Hopes Of Greece Deal
    Ferrovial, Macquarie Put Up For Sale Concession In Chicago Toll Road
    Oil Slips As Market Awaits Iran, Greece Talks
    Tesco Sales Down Less Than Expected In First Quarter
    Aetna Close To Buying Humana
    GE Invests In $348 Million Windfarm After Australian Subsidy Deadlock Ends
    Capital One, Apollo Among Bidders For GE Health-care Lender
    Nike Beats Estimates Again As Demand Shows No Sign Of Abating
    The Fear Factor Behind Stock Prices
    What’s Really Going On At Fukushima?
    A $300 Million Layover: CYNK Mastermind Arrested After Phoenix Diversion
    Read more from Investing...

    Liberty Investor Digest

    Get today's most important
    financial headlines all in
    one place by email!



    Sign Up For Liberty Investor Digest™!

    Get Liberty Investor Digest FREE By Email!

    Input your name and email address in the fields below and get today's most important financial headlines sent straight to you inbox!

    Privacy PolicyYou can opt-out at any time. We protect your information like a mother hen. We will not sell or rent your email address to anyone for any reason.