Playing Mr and Missus Nice – Central Banks and Living It Up On Leverage in Singapore

Traders and investors all have the same prayer to their gods – that inflation continues to fall and central banks around the world will keep up with their stimulus for stocks and bonds to rally.

Since when are central banks so quick to pull the trigger especially when the Eurozone economy is set to have their best quarter in 3 years ? And the US is not looking too poorly.
http://www.markiteconomics.com/Survey/PressRelease.mvc/ee66d546cfb148bfa13b8331c0f337ac

It is control freak Mr and Missus Nice behaviour and it is so successful that investors are all on the same page.

Investors seem to have reached a consensus on stocks, bonds and the economy these days, at least according to Goldman Sachs.

Almost all clients have the same outlook: 3% economic growth, rising earnings, rising bond yields, and a rising equity market,” Goldman’s chief equity strategist David Kostin wrote in a research note. http://blogs.wsj.com/moneybeat/2014/06/02/goldman-sachs-heres-what-our-clients-think-about-the-markets/

Yet investors are loading into high beta assets on leverage even though they believe that rates will head up eventually which is  masochistic behaviour.

That is because we are caught in a low volatility environment knowing that central banks (control freaks) will protect the downside. This has led to much inactivity in the marketplace which is abnormal, according to Goldman.  http://www.bloomberg.com/news/2014-05-28/goldman-s-cohn-says-inactive-trading-environment-is-abnormal-.html

But you cannot be a control freak without breeding a monster and Singapore has caught the disease much faster than her neighbours.

Singapore companies’ indebtedness has swelled to the most in Asia after China and India as the city-state’s economic growth slows, according to GMT Research Ltd.

Leverage among the Southeast Asian nation’s corporates is following counterparts in the two larger economies to a level considered a “danger threshold,” Gillem Tulloch, founder of the Hong Kong-based researcher, said in an interview yesterday. Debt rose to six times the amount of operating cash flow in 2013 for non-financial Singaporean companies, from 5.1 times in 2012, a report by GMT Research shows.”
http://www.bloomberg.com/news/2014-06-04/singapore-joins-china-with-dangerous-debt-level-gmt-says.html

It is a brilliant read of the markets by smart Singaporean companies borrowing up  to their hilts right now because as the Goldman report indicates, yields will rise pretty soon.

What about Singaporeans ?

Forced competition amongst banks for clients has forced some outfits to assign lending value for bonds that traditionally get zero leverage. Those very corporates mentioned above leverage by issuing bonds that are being bought on leverage too.

I do not believe that central banks are unaware of these developments because they have been warning us of overheating in risky asset prices and they are not going to take too well to the latest report that Payment In Kind notes (pay their coupon with more debt) have doubled their 2013 total issuance even before 1H14 is over. http://www.zerohedge.com/news/2014-06-03/welcome-new-yield-hunger-games

Yet it has become apparent that they see their job scope inflation and unemployment fighters these days. There is also the hidden agenda.

Lessons from America
taken from http://www.project-syndicate.org/commentary/martin-feldstein-traces-the-sources-of-the-us-economy-s-upturn-and-points-out-the-risks-that-lie-ahead

1. The primary driver of US’s faster GDP growth is the $10 trillion rise in household wealth that occurred in 2013 – $2 trillion increase in the value of homes and an $8 trillion rise in the value of shares, unincorporated businesses, and other net financial assets.

2. Increase in wealth = rise in consumer spending and using past numbers of 4%, the $10 trillion should equate to $400 billion in spending = 2.5% of US GDP !

Wealth has to be created to drive GDP growth !

Thus central banks have to keep it up and clever investors in Singapore know that they got their backs covered even though they know, like all the investors Goldman surveyed, that yields will rise eventually yet surely he central banks will step in on any signs of distress.

It is like a naughty child but its the only way to go whilst banks and central banks are busy playing Mr and Missus Nice and committed to creating wealth for the world.