Economic and Investment Update – September 2014 Points of Interest – Spring 2014

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Money can be funny

This article originally published in The Northern Daily Leader on 27 September 2014. 

I recently sat down to do some long term planning – wondering what first car I would buy our son, Jack, when he eventually learns to drive. As Jack only turns four in December, you can tell that I like to have canvassed all my options long before any decision is required. My musings were prompted by the long line of Year 12 P-platers parked outside McCarthy Catholic College every school morning. Some drove small hatchbacks with names that sounded like a schoolies party at the Gold Coast: Fiesta, Spark and Sonic. Others drove mud-splattered four-wheel-drives, while a few unlucky ones were driving mum’s old Volvo station wagon or something similar. Not that there’s anything wrong with a Volvo, or with station wagons in general, it’s just that even I’m not too old to know that neither one of those types of cars are particularly ‘cool’.

As I’ve mentioned in the past, cars can be a lot like investing. Some drivers (and investors) prefer their cars (and investments) to be fast and noisy, prone to swerving all over the place and with the odd occasional crash. Others prefer safety over speed and are quite happy getting from A to B at a sedate pace and without all the angst and concern that accompanies a crash (both in automotive and financial terms). And just as cars can be hotted up with mag wheels, spoilers, LED running lights, mega-watt subwoofers and an exhaust so wide you could fit your leg in there, so too is the world of finance prone to a bit of over-engineering. In fact, one of the informal indicators we follow when assessing the state of global and domestic financial markets, is the answer to the question: “Has the funny money arrived yet?” By ‘funny money’ we don’t mean the arrival of Billy Connolly bearing dollar bills – what we mean is, have financial markets started to get just a little bit too creative? Have well-paid investment bankers begun to invent creative and confusing ways of turning one dollar into ten? Is the financial press full of acronyms such as CDO, SIV and CLO, or words like credit derivatives, structured products and synthetic arbitrage?

The funny money usually makes an appearance near the top of any investment market, when money is cheap and it seems like the good times will never end. Private equity deals, leveraged management buyouts and ludicrous takeover bids all get funded by the funny money, usually just before the bottom falls out of the stock market (remember the almost entirely debt-funded private equity takeover bid for Qantas in late 2006?). So has the funny money arrived yet, or will the party continue on for longer? We think the latter, although Billy Connolly may not be too far away.