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Money in a time of financial cholera: part one

Satyajit Das  |  04 Feb 2013Text size  Decrease  Increase  |  

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Satyajit Das is a former banker and the author of Extreme Money: The Masters of the Universe and the Cult of Risk.


In 2012, despite slowing growth, deepening sovereign debt problems and lacklustre earnings, equity markets advanced strongly. In 2012, the MSCI All-Country World Index of equities increased 16.9 per cent, including dividends.

Twenty three out of 24 benchmark indexes in developed markets increased. The US S&P 500 Index climbed 13 per cent, the highest increase since 2009.

European markets rallied with Greece, Germany and Denmark increasing almost 30 per cent. Only Spain's IBEX 35 fell, but only by a modest 5 per cent. Despite its embalmed economy, Japan's Nikkei 225 Stock Average rose 23 per cent in the largest rally since 2005.

Bonds of all types returned around 5.7 per cent on average. Safe-haven buying and demand for yield increased, fuelling demand for bonds. Ever lower interest rates and risk margins did nothing to discourage buying.

Despite continued debasement of currencies through central bank quantitative easing, the S&P GSCI Total Return Index of 24 commodities rose 0.1 per cent.

Highlighting the perversity, even debt of beleaguered European nations was in demand. Astute investors doubled their money on Greek bonds, in a surreal bet on an economically dead nation incapable of paying backs its debt. "'Tis a mad world, my masters."

In Chinese, "Shi" is the art of understanding matter in flux. To preserve capital and the purchasing power of their money in these dysfunctional times, investors will need to understand the financial flux and negotiate its complicated cross currents.


Ch-ch-changes ...

Investors could easily delude themselves into thinking that "happy days" have returned. As smart investors know, investment genius is a long position, leverage and a rising market. A rising tide, as they say, lifts all boats. But that may now be all in past. There has been a marked shift in the investment climate.

Investment outcomes are now heavily dependent on government and central bank policy decisions. The rally in the euro and European bonds and stocks following the European Central Bank's announcement that it would purchase unlimited quantities of peripheral country debt demonstrated the risk of misreading policy.

Major central banks dominate markets. Their collective balance sheets have increased from around US$6 trillion before the crisis to more than US$18 trillion, an unprecedented 30 per cent of global GDP.

Government and central bank strategy is targeted at growth and creating inflation using non-conventional monetary policies, quantitative easing and specific inflation targets. High nominal growth would make existing debt levels more sustainable. Inflation would help reduce debt in real terms. But the strategy may not work.