Global Finance magazine sought me out for comment in their latest issue. The article discussed the state of global credit markets and the significant distortions introduced by massive monetary expansion and stimulus.
Some analysts say government stimulus packages could prove to be a double-edged sword. “Injecting massive monetary stimulus into the world economy is like taking huge doses of anabolic steroids into your body; expect urges to take risks that you would not normally take, and to have some body parts shrink, while others bulge,” says Robert Smith, founder and managing director of Turan Corporation in Boston and author, along with Peter Zheutlin, of Riches Among the Ruins: Adventures in the Dark Corners of the Global Economy. He says shrinking body parts are a metaphor for the US dollar, while commodity prices, high-coupon currencies, debt and equity prices, and Chinese real estate represent the bulges.
“Investors, crazed by monetary steroids, are playing Russian roulette with a pistol loaded with duration and credit risk. Investors are crawling out farther and farther on the yield curve looking for higher yields; they are taking greater and greater credit risks just to get a few hundred basis points above the paltry yields of US treasuries,” says Smith. He points to access to international bond markets by El Salvador, Angola, Nigeria and Vietnam, and the expected market return this year by Russia at just a few percentage points above US treasuries, as proof.
Overconfidence in the liquidity and creditworthiness of emerging markets led to minor panics in places like Greece and Dubai, as investors suddenly realized they had overestimated the security of those investments. It remains to be seen how long surging asset values can continue, but central bank interest rates will surely be a key factor.
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