The Three Wise Men
Three people in America now have more money than the bottom 50% of Americans. You wonder about the disruption and discontent around the world and perhaps this has something to do with it.
To be fair, two of them have made massive contributions to society and one has made his money selling sugary drinks to children with diabetes, but overall, you couldn’t really deny them their money. The slight issue in all of this though is our three wise men can (and do) borrow money at 1-2% and the 50% of Americans with almost no money borrow on credit cards at an average of 17%. Credit card rates have hardly fallen at all since 2008.
Take Microsoft, which has a huge cash pile. You might wonder why they borrow money at all? I certainly did wonder, so I had a look in their Annual Report and they were pretty open about it:
We issue debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit rating and the low interest rate environment. The proceeds of these issuances were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, repurchases of capital stock, acquisitions, and repayment of existing debt.
So borrow money, for almost nothing, buy back your stock, enrich yourself and your management team for almost no cost because you are close to the monetary spigot. More specifically, since 2017, Microsoft has issued $51 billion in debt and repurchased $43 billion in its own stock (curiously similar amounts). It’s sensible balance sheet management, they are not breaking the law but the totally distorted price of money is creating huge issues.
As all this monetary magic plays out, more and more people look for alternatives. In Australia this week crypto exchange Independent Reserve pointed out that 17% of under 35s now own some form of crypto-currency and are planning on buying more in the next six months. The suspicion of fiat currency runs deeper and deeper among young people, as it should.
More interesting is that in the millennial cohort, not only do they not trust fiat, a large and growing number prefer it to traditional asset classes (not a majority though at this stage).
The issue of course is that these asset classes make up a large part of the retiring populations funds. They will be divesting bonds, stocks real estate en masse over the next 20 years. Who is going to buy this stuff? Some people will, but the younger cohorts are smaller to begin with and they do not like traditional assets as much as their parents. This is why I think bitcoin is suitable for all age groups, for older people it is a brilliant hedge against technological change, monetary change and inflation. For younger people it could very well be the weapon of wealth transfer.
I could simply be speculating but happily I came across the International Monetary Fund’s Global Stability Report, which as you will see in the next section, has rather similar conclusions.
Lower for Longer
- They expect low interest rates for an extended period (hence lower for longer)
- The low interest rate environment is causing pension funds to take on more risk to try and generate the returns they need to meet liabilities. They point out that pension funds historically have been a natural stabiliser of markets as a net buyer, this is no longer true as they begin to divest with a net ageing population
- Corporate debt is high and rising. The IMF recommend looking at the tax treatment of debt v equity to change company behaviours.
- Emerging market countries are taking on too much debt and too much risk
Ultimately, the IMF tells us the financial future can be safeguarded through “broader macro-prudential regulation and stricter supervision” and “full implementation of a global regulatory reform agenda”.
I have absolutely no idea what that means. It makes me wonder who works for the IMF? Who sat around the table and said “I know, we need some new rules, lots and lots of them”? I doubt very much that after all the regulatory change since 2008 further rules will make any difference. Ultimately, if governments and central banks force the interest rate down because they cannot finance their own borrowing, then companies, countries, individuals and every market participant will borrow more because it makes sense to do so.
The report is full of unintelligible charts, the one below was a stand out though. In advanced economies 90% of bonds are now paying less than 2% and 20% of them are paying a negative yield. The market thinks that will last as far as the graph can see, which according to the x axis says is 2023, but it might as well be infinity.
Here’s another reason why this perversion of the price of money really matters, this time from the Wall Street Journal. It’s an analysis of US companies worth at least US$300 million and compares their before interest earnings to their interest cost.
For companies worth less than US$1billion, 28% of them do not have earnings sufficient to cover their interest payments. Perhaps that is not too surprising, since many failing and failed companies will be in that value category.
However 23% of companies valued from US$1bn – US$5bn cannot pay their interest either. A $5 billion company is a big business, for example in the US, Retailer Macy’s which is in the S&P500, is worth exactly US$5 billion and as you may know, it likely won’t see out the next few years.
The point is, these zombie companies should be bankrupt, it is a massive mis-allocation of resources.
Does the price of money really matter?
In the end though, does it matter? Cheap money has sent the stock market to all time highs. It has enabled governments to continue funding health and education without resorting to more radical and prudent measures like balancing a budget. Unemployment is low, life expectancy is rising.
Looking forward, there are giant piles of cash sat around the world with big companies and venture capitalists, that money is waiting to invest it in new and exciting projects.
However, I think it matters deeply, I think the distortion of the price of money is a fraud on the general public on a global scale and it will be revealed. In fact, I cannot think of a more efficient yet opaque way of transferring massive value from one group of people to another.
To calm my nerves I logged on to my bitcoin node and typed the following:
> bitcoin-cli gettxoutsetinfo
It confirmed exactly how many bitcoins are currently in circulation at this moment (18,060,254). A figure verified by hundreds of thousands of nodes around the world. My question is only this, how many US dollars are out there right now? You have absolutely no idea, neither does the Federal Reserve and right now, it doesn’t seem to matter either.