Japanification

The world has record debt levels.

The problem is only getting worse not better.

The only way central bankers know how to deal with this situation is by continually injecting adrenalin (liquidity) into the system.

The world is on life support.

Japan has been on life support for 32 years. The scenario where the world becomes Japan is certainly not zero.

Japanification may happen.

Central banks have never been more interventionist.

The bond market is the compass for capital markets. This compass is broken.

In years gone by, you could count on the breathing in and breathing out of markets. The cycles were not predictable in timing, however they were knowable that they would eventually end. There are always those who overextend. They take risks they shouldn’t or simply fail due to competition.

The natural breathing in and out of markets seems to have ceased. The period of March 2020 was so brief, it was closer to hyperventilation than a normal breath.

Central bank intervention may mean we no longer have normal cycles.

As Warren Buffett stated on how to become wealthy:

“Close the doors. Be fearful when others are greedy and greedy when others are fearful”

The only problem is, that the fear needed for Warren and Charlie’s phone to ring didn’t happen last year and there is a possibility that the phone doesn’t ring in a permanently manipulated central bank market.

No one knows, however this is not a zero probability.

If we have gone down the rabbit hole and the central bankers of the world are required to continually pump up the system on a regular basis, then how does this affect the way you should allocate capital?

Competition

Competition is no longer based on having a business advantage, it is now based on the amount of capital you borrow or raise. When money is free, large numbers of unworthy borrowers are able to continue their unprofitable companies.

Loss making companies have never been in such high demand.

Some fund managers have been riding this trend and made spectacular gains last year.

The question is, will the kindness of strangers continue to keep the lights on? Can central banks…