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According to the founder of the worlds largest hedge fund, Bridgewater Associates, The Central Bank Is Printing Money For You.
Since first publishing "Principles" his best selling book and the you-tube video "How The Economic Machine Works", Ray Dalio has gone out of his way to explain the relationship between the central bank, the Central Government and Asset Prices. In a nutshell, he believes that we are in that part of the long term debt cycle where interest rates are so low that the only effective support the government can give to the economy is via Monetary Stimulation.
In practical terms this takes the form of Central Banks around the world Printing Money to buy government bonds and other financial assets. This stimulus supports Asset Prices and we all know what happens when asset prices are high. Investor confidence is high and investors are more likely to go out and spend and ideally borrow money and spend. Borrowing from our future selves, as Mr Dalio would put it, in his explanation of how cycles occur and are predictable, repeatable and in his case, bankable!
This policy of Central Banks Printing Money a policy known as Quantitative Easing, is good only for those with financial assets of course.
Access to cheap borrowing and monetary stimulus encourages large financial institution asset managers to invest heavily in assets which can yield greater than the near zero returns available to them from bonds. You will remember that this is what happened just before the "Great Financial Meltdown of 2008". Asset managers ignored warning signs, such as default rates, and sought out high yielding assets, often taking the form of CDOs and other "Synthetic Asset" classes, that ultimately proved worthless. But more on that later.
So to continue, what if you do not hold financial assets, then you cannot benefit from the handout. The government of course assumes the trickle through effect. This means that those who benefit, will spend money. And according to Mr Dalio, the spending of money by one person is the income of another.
Let's say that I am happy to spend in a bar because I have made some healthy returns of late, my spending will will generate an income for the bartender. That income makes the bar tender wealthier than he was before my spending spree. He is also now more creditworthy to the banks and can presumably borrow more.
So lenders are now more likely to extend the barman credit. He can spend and thus support the economy. So why are we concerned about the economy? In short the time it takes for the trickle down effect to happen could be very long. Even if I want to go out and spend the Corona virus Pandemic and Initial Government Advice "stay home to stay safe", will prevent that spend any time soon.
Of course the government do realise this. Which calls into question their recent guidance to go out and spend. Is it possible that precisely because they realise that stay at home asset holding types, are less likely to go out and spend that they have effectively u-turned on their previous medically supported science driven advice and have now decided to adopt a more "US-Centric" approach, which increasingly appears to be to play down the science in favour of encouraging potentially reckless, literally what could be deemed to be self destructive behaviours?
After all there is no known treatment or vaccine currently available to the public to treat Covid 19. Albeit that many trials are underway and promising, if we are to believe the hype, but surely hope cannot help in an emergency!
So yes, it would appear the Central Bank is printing a blank cheque, (or check in the US), but it might be some time before you can actually cash it in. Whichever side of the "Asset Class Divide" you may find yourself on.
So back to those institutional asset managers. If we are to take Mr Ray Dalio at his word, we should look to take lessons from history. So if in 2008 the Large Institutional Investment managers, actively ignored warning signs in a failed attempt to generate yield from a dubiously rated pool of assets, I must ask you a question. Are we seeing this happening all over again? Take Mr Bill Ackman for example, the renowned activist investor, of Herbalife fame. He has recently increased the size of this latest Pershing Square Tontine Holdings fund from 3 to 4 Billion US Dollars, with an option to go up to $6.45 billion. This is clearly a sign, is it not, that money is chasing return. We know that his funds have a record of returning high returns. 15% I believe is his long term record, so if this is true, will this money not be chasing overpriced assets? And should we not expect that if and when the stimulus is reversed that this money could easily evaporate!.
Of course the argument of the Ackmans' of the world is that they are stock pickers, and because they select quality assets, this buffers them. The so called Buffets Moat effect. In this case I would say to a large extent possibly, yet many more managers will simply pile into indexes and presumably will not have the same cushion as Mr Ackmans' fund.If you would like to comment on any articles please register to the site, follow / subscribe / friend as appropriate and leave your comments.
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