August 20, 2012
Despite having some time on my hands to think, I am still baffled by the current state of the markets.
Firstly, despite all the potential risks facing the global economy (Greece, Spain, Italy, the US financial cliff and a slowdown in China) stock markets seem to be surprisingly buoyant. Dare I say rosy…? Who knows why. There isn’t a lot to smile about anywhere. It seems as though the laws of gravity have been temporarily suspended.
In the bond markets things are even stranger. This story from the BBC explains some of the issues currently facing Greece. To quote, “Last week, Greece was able to raise 4.06bn euros with an issue of three-month treasury bills, but the government had to offer an interest rate of 4.43% to attract investors.”
Considering the everyone on earth must now be aware that Greece is broke, most people are baffled as to why they are still in the euro and holders of Greek debt took an almighty haircut earlier in the year, it seems amazing that there is anyone anywhere willing to purchase their bonds – even if only for a three month term.
Should such people be willing to purchase those bonds, I would suggest that an interest rate of 4.43% is incredibly cheap considering the risks. While politicos and economists view it as a high rate of interest and close to unsustainable in the long term, the rest of us would expect to earn 40% or more, given the risks attached.
It would seem reasonable to presume that all the money sloshing around (via QE and the ECB money pumped into the banking system) needs a home. Still, I find it hard to believe that there would be any private investors willing to risk their own capital on something so risky.
Typically, we think of the big brains running investment funds, insurance companies and banks as being the “smart money”. It doesn’t feel like that now, does it?financialguy