2017 is the 180th anniversary of the publication of Hans Christian Andersen’s short story “The Emperor’s New Clothes”. For those not familiar with the tale, it is the story of how two conmen convinced an Emperor to part with money for nothing – by creating a scheme whereby those who challenged prevailing wisdom were made to seem stupid. Ultimately the scheme unravelled when an innocent, a small child, laughed at the stupidity of the situation.
My problem – I’ve borrowed a bit of money and can’t really afford to repay it, so in a giant Ponzi scheme that would make Bernie Madoff blush I’m going to get people to give me more at ridiculously low levels, such low rates of interest in fact I really don’t need to worry about how much money I get.
My clever scheme – the economy is in a mess and I can sell you something that is guaranteed to make you a tiny amount of money. I know the data suggests things are actually as good as they have been for 20 years, but we all know “experts” and “facts” are so 20th century. Trust me, I can make you rich.
German 10-year bonds yield 0.25%.
German (nominal) growth is around 3.5%.
You can lend money to Germany and get 0.25% back each year.
Germany makes 3.5%.
Do that for 10 years: you get around 3% total return, Germany over 40% (did someone mention compounding?).
Now replace Germany with the UK, US (to a lesser extent) and even Japan.
But are Mark, Janet and Mario the Emperors, the conmen or the children?
Hey, if you want to buy the beta of the bond market – if you want that return-free risk – go ahead. Who am I to stop you?
One final thing to note: 2017 is the 176th anniversary of the publication of Charles Mackay’s seminal work – “Popular Delusions and the Madness of Crowds”.