The Dow rose 185 points on Friday. Gold lost $1.50 an ounce.
We spent the weekend here at our place in France painting old windows, while observing the customs and culture of young adults.
Several of our children have come to visit, bringing friends with them. We ended up with a group of a dozen or so 20- and 30-somethings.
One of the young men here reminds us of the French film star from the 1960s Alain Delon. Tanned. With dark, cropped hair. Dark eyes. Wearing a silk scarf.
One of the young women looks as though she could be a move star, too. Dark, curly hair. Beautiful eyes. Flirtatious. Perhaps ‘flighty’, too.
Our first observation is that these young people get up late. We rarely lay eyes on them before noon. Sometimes, late-night parties and jet lag combine to produce bat-like schedules. They sleep all day and come out after the sun goes down.
Last night, they all went down to the pond and made a campfire. They were still there when we went to bed.
‘Oh…come sit down. How nice to see you for breakfast,’ we said to one this morning. ‘Glad you got up early.’
‘Uh…no…I was just talking with Henry. Now I’m going to bed.’
‘You mean, you’ve been up all night?’
We have been exploring how the feds’ funny money policies have corrupted our society in remarkable and unexpected ways…and lulled investors asleep.
Could these strange sleeping habits be a result of artificially low rates?
Unable to get a purchase on the idea, we conclude that not everything is a feature of monetary policy.
Still, it is amazing how much of what we take for granted is a consequence of this exceptional monetary system. So, we’re devoting the upcoming month’s issue of our new project, the Bill Bonner Letter, to discussing scams, hustles and hoodwinks of the EZ money era.
After we finished writing this month’s ‘beta’ issue, E.B. Tucker, our lead researcher, sent us yet another example:
‘Remember Dionne Warwick’s late night infomercials offering the answers to all life’s problems for a $3.99/min psychic consultation?
‘That was the Psychic Friends Network.
‘Now it’s entering peer-to-peer lending! It bought 321 Lend, Inc. this month.
‘Last year was a $5 billion year for P2P lending…and there’s huge upside.
‘The longer the fed keeps rates at 0%, the more ‘investors’ will be willing to fund loans to sketchy borrowers.’
And here’s the Wall Street Journal with more:
‘Governments and companies around the world are borrowing cash they won’t have to repay for at least three decades, seizing upon this year’s unexpected fall in interest rates to lock in cheap financing for as long as possible.
‘Global sales of sovereign and corporate bonds that mature after 30 years have reached $142.5 billion this year as of Tuesday, a 22% rise from the same period last year and a 55% jump from the same period in 2012, according to data provider Dealogic.
‘Their growth far outpaces sales of government and corporate bonds due in 30 years or less. Those bond offerings totaled $5.236 trillion so far this year, a 4.6% increase from the same period in 2012.’
Why the rush to ultra-long durations?
Borrowers want to take advantage of low rates. For their part, investors want to get a little more yield.
Typically, the longer a bond’s duration, the higher the yield. Because time multiplies risk. The longer into the future you go, the more likely it is that the issuer will go broke…and rising rates will push down the price of your bond.
In the world of super-low rates and super-easy money, over the short run few debtors go belly up. In the long run all of them do. The credit cycle turns against them. Financial shocks bash them. And geopolitical disasters catch them unaware.
In a world of zero-interest rates, investors stretch for yield. It is just a matter of time until they pull a ligament.
For Markets and Money