• Andreas identifies four drivers of Codan's strong performance: Read here.

Bubble Watch #17 – The Red pill or the Blue pill?


Bubble Watch #17 – The Red pill or the Blue pill?

Some times you just wake up with a clear view of our current condition. I think my friend Chris Joye, a columnist for the The Australian Financial Review and a director at YBR Funds Management, might be feeling a little like Neo did in the movie The Matrix, when he woke up to see reality for the first time.

In his article today, Why Capitalism Is Not Doing Its Job, Chris makes the observation:

“There is absolutely a role for governments to vouchsafe a minimum level of liquidity when markets temporarily shut tight in crises. I argued this in March 2008 apropos the securitisation market, which the government ended up (very) profitably supporting with $15 billion.

Yet seven years after the GFC central banks continue with their unrelenting campaign to reject market prices and impose their own false values through buying government bonds, bank bonds, corporate bonds, asset-backed bonds and, amazingly, direct equities.

While the US Federal Reserve has announced that it will stop its $2.4 trillion asset purchase program, the European Central Bank and the Bank of Japan will more than compensate with their own attempts to bolster asset prices.

The ECB is expanding its balance sheet by between $1.4 trillion and $4.2 trillion through investments in asset-backed securities, bank-issued covered bonds and possibly corporate bonds. These outright purchases are on top of the ECB’s long-term lending facilities, where banks can borrow hundreds of billions of euros at just 0.15 per cent.

Last Friday the Bank of Japan shocked markets with the announcement that it will boost its purchases of Japanese government bonds to $800 billion each year. It also increased its annual investments in Japanese exchange-traded funds (equities) and listed property trusts to $30 billion and $900 million, respectively.

Around the world stocks and bonds soared on the news. Central bankers are combining these investments with near-zero short-term cash rates, which has lowered the cost of borrowing to the cheapest levels in history. Any asset-class that relies on leverage has consequently been a major beneficiary.

In most countries you can borrow more against residential property than other investment categories. It should be no surprise, therefore, that house prices in Australia, Britain, Canada, New Zealand and the US have been surging on the back of the most attractive mortgage rates borrowers have seen.

My concern is that these policies are making the problems that existed prior to the GFC worse. Most agree the crisis was triggered by excessive debt, cheap money, and overvalued investments. But today we have more debt, even cheaper money, and dearer asset prices.

The shock that erupted in 2007 was a clear market signal that we needed to reallocate scarce people and capital, which had become overexposed to financial services and other leveraged assets like housing, to more productive activities.

By preventing markets from clearing, we are fundamentally undermining the creative destruction that has powered prosperity for a century.”

He adds, “The prices we see today for equities, bonds and housing are not remotely near their true market “clearing” levels.”

And quoting Australia’s Matthew McLennan who manages $80 billion for US-based First Eagle Investments, “they are fake prices, that have been artificially lifted by governments spending trillions of dollars buying assets in a misguided bid to maintain their values.”

You can read the full article here.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE


find out more



  1. What scares me the most is that Skaffold Global is showing very few top quality investments to chose from at present. Anything that is in my portfolio that looks like it has reached its potential or I have any lingering doubts about is being culled from my portfolio. There simply has to be a very good reason for holding a stock at present.

  2. Sir-Greg-Armstrong

    If there was another GFC (which is certainly going to happen).. How does one hedge against the inevitable? Considering china has 3 times the amount of gold than any other country, Has just started a new bank with the BRICS. (Maybe it should be the BARICKS???) Also knowing countries are turning their nose up to the US dollar due to lack of confidence. Wouldn’t it be a great idea to buy some of those 1kg gold bars that china has been stockpiling..?

    • Armageddonists are always with us but look at the long term history of value creation in business and compare that to changes in the price of gold over the same period….A single share of Coke bought at $40 when it floated in 1919 and held through the great depression, WWII, presidential assassinations, inflation, deflation, recessions, currency crises, oil crises, etc etc, has turned into more than $11 million after all splits and dividends have been reinvested. $40 worth of gold in 1919 (Sept 12, 1919, the price was $20.67 a troy ounce) now has a market value of about $2,400.

  3. This is a great straight talking piece by Chris. All the central banks of the world should have done through the GFC was mitigate the most damaging fallout then let capitalism work as it is supposed to. Of course the journey since would not have been as superficially smooth as it has seemed, but we would be looking forward to a more stable future than that offered by the shaky house of cards in which we now reside.

  4. Roger, you’re a smarter man than me.
    But you know on the balance sheet that numbers mean nothing if the quality is poor. It’s asset quality that is the key.

    Do you think these things are marked to market? Sorry, rhetorical question, we know they aren’t.

    I mean QE is specifically buying Mortgage Backed Securities. I thought these things were being bought because they were toxic on the balance sheet of the initial banks that issued them / bought them / traded them.

    If they’re still performing, that’s great, we can go to sleep right? I doubt this is the case though.

    What’s the plan to exit ? Can they exit. These are the unanswered questions!

    • no exit man: stop, start; stop start since 1913. they are in the business of protecting biggest banks .. before was 20 now maybe 10.

  5. Hi Roger,

    The current economic conditions clearly have no precedent in our own lifetimes. Whilst I have no formal training in the field of economics I agree with the views of many people a lot smarter than myself (yourself included) that we do not appear to be heading towards a good outcome with the current monetary policies towards that are in place.

    Whilst impossible to predict a roadmap for this journey, it seems clear that Japan’s efforts will ensure that it places itself centre stage when the confidence game begins to be lost by the central banks.

    If traditionally the Yen and US$ have been treated as the safe haven assets when fear explodes I wonder if the Yen will be again next time around. The US seems to be the best of the bad bunch and if this is the case then US 10 year bonds would likely be in such demand as to reach yields below the equivalent Japanese yields that are seen today.

    It is also a curious observation to me that in Australia the era of cheap money has affected house prices more so than financial markets whereas in the US the converse seems true. I guess with the current policies in place anything is possible!



    • since August 15, 1971 we live in the fiat world. Is this the longest fiat not sure how long will last well for sure not 1000 years.

Post your comments