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Austerity is dead: markets bet on red


Paul Sommerville

Paul Sommerville

Paul Sommerville

Recent moves by financial markets are truly extraordinary.

Last week Germany's DAX hit an all-time high after climbing nearly 1,000 points (10 per cent) in one month. The DAX joins the USA indices also at record all-time highs with both the S+P and Dow Jones up 17 per cent so far this year. Most of the major country-specific benchmarks around the world have been climbing to multi-year highs with the star of the class being the Nikkei in Japan returning year to date a whopping 43 per cent. The world is awash with money, free money!

It is not just stocks. Government bond yields across the globe are plummeting as investors rush to buy any asset with any sort of yield. Bond yields fall when prices rise. Italian, Spanish, Greek, Irish bonds are all in demand regardless of risk or duration. If you have free money but are told you have to bet with it, sure why not! You have nothing to lose.

Oh, but don't worry if government bonds are not your thing as a bank trader (too safe of course), there is always junk bonds. Last week the stampede into junk bonds passed another milestone when the Barclays US corporate High Yield index fell to a record low of 4.97 per cent, the first time ever the benchmark tracking debt issued by weaker US companies dropped below 5 per cent. There is now a powerful belief among investors that corporations with the weakest potential for paying interest and principal on their debt obligations are a worthy investment. Everywhere there is a dash for trash. Low returns on super safe Treasury bonds and bank savings accounts have spurred a rush into investments that offer any promise of steady income.

Everything is a TINA trade: THERE IS NO ALTERNATIVE.

The central bankers with the tsunami of money created out of thin air have created a mania – a Ponzi scheme. They euphemistically call it "the wealth effect". It is believed if they can raise asset prices, especially the stock market, people with feel more wealthy and will go out and spend. When the two leading central bankers in the world judge their success by the rising price of the stock market, it is really time to worry.

The numbers are mind boggling but it is worth going through them – just so you can tell your grandchildren the lunacy that went on. The USA federal reserve currently is flooding the system with $85bn per month. Not to be outdone, the Japanese announced the bazooka of central bank expansion of monetisation to a whopping 7 trillion yen per month.

What is that in real money? If one were to pro-rate the latest Japanese monetisation effort to the US taking into account the size of both economies, one would get a mind-blowing $200bn per month and $2.4 trillion per year in quantitative easing dollars.

This money is already flowing into European bond markets so you can expect many more declarations of how Europe is saved in the months to come. This is why austerity is dead. Politicians and economists are now bored with the concept. No point being unpopular; give the masses what they want. Not only that but it is now impossible to, on the one hand, declare they have saved Europe and at the same time impose cuts. The cuts around Europe were merely an illusion anyhow as they are not cuts but slower increases. The European economy is a bureaucratic cesspool but it surely won't be long before they forego the structural reforms so badly needed and join other central banks and try to print their way out.

For Ireland, any European policy that lessens austerity and promotes spending is to be welcomed no matter how much it may eventually damage the EU economy. Also the falls in our bond yields give confidence to the outside world that we are sticking to a plan. But it is crucial, not for outsiders but for ourselves, that we continue with the reforms so badly needed. We must be in the best shape we can be when the fallout from this never tried economic experiment perpetrated by bankers for the benefit of bankers comes to its conclusion. Our Government is doing a difficult job in difficult circumstances but my worry is the complete lack of leadership and vision of where we are trying to take the country beyond the bailout. Any new political party will need to take a robust adversarial, Eurosceptic approach if we do not want to be debt slaves to EU financial elite (more London than Paris), but that is another day's discussion.

As Bill Gross, manager of PIMCO, the largest bond fund, said during the week, "Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk."

For now austerity is dead. It is time for the financial markets to bet all this paper money on red.

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