Où le boeuf?

There is a lot of wealth being created and not enough safe ways of transferring that wealth into the future.

At least that is one conclusion to draw given the sky-high prices for blue-chip equities, stratospheric home values and rentals in many of the world’s top-tier cities (Canada and Australia are just ludicrous), negative real rates (and sometimes negative nominal rates) on some government securities, and the popularity of alternative assets such as Bitcoin and other crypto-assets. It’s a bull market in everything.

Not only have assets been steadily rising against a backdrop of extraordinarily loose monetary policy, but emergingmarkets have also come out of testing times in far more resilient shape: over the past few decades there has been a remarkable increase of wealth in the world, most of all in the emerging economies. This is helping keep prices high.

For example – imagine you are one of the now millions of Nigerians, Indonesians and Pakistanis that holds enough wealth to invest (there are around 650 million people and GDP of $1.7tn across these markets): what are your options? The stock markets of Russia and China are unscrupulous and not well developed, as are your local exchanges in this example. So you might take a disproportionate share of your money and put it into high-quality, highly liquid assets: the S&P500, Dow or London real estate to name some possibilities.

While this state of affairs persists, with a relative shortage of safe investment opportunities, those prices can be driven high and stay high for a long time. And you know there is a relative shortage of safe investment opportunities when investors are willing to buy Eurobonds issued by Iraq, Ukraine and Egypt at yields of around 7%. Iraq was oversubscribed by six times and pushed down to 6.75%. Even Tajikistan and Bahrain borrowed at record low rates.

So what does it all mean? It means wealth creation has outpaced its natural counterpart: quality investment institutions. It also means that if prices fall in the future, it does not have to translate into crisis and bubble bursting – rather just regression back to the mean.

Hopefully.