Best of the Week
Most Popular
1.US Paving the Way for Massive First Strike on North Korea Nuclear and Missile Infrastructure - Nadeem_Walayat
2.Trump Reset: US War With China, North Korea Nuclear Flashpoint - Video - Nadeem_Walayat
3.Silver Junior Mining Stocks 2017 Q2 Fundamentals - Zeal_LLC
4.Soaring Inflation Plunges UK Economy Into Stagflation, Triggers Government Pay Cap Panic! - Nadeem_Walayat
5.The Bitcoin Blueprint To Your Financial Freedom - Sean Keyes
6.North Korea 'Begging for War', 'Enough is Enough', is a US Nuclear Strike Imminent? - Nadeem_Walayat
7.Bitcoin Hits All-Time High and Smashes Through $5,000 As Gold Shows Continued Strength - Jeff_Berwick
8.2017 is NOT "Just Another Year" for the Stock Market: Here's Why - EWI
9.Gold : The Anatomy of the Bottoming Process - Rambus_Chartology
10.Bitcoin Falls 20% as Mobius and Chinese Regulators Warn - GoldCore
Last 7 days
USDJPY Leads the way for a Resurgent Greenback - 22nd Sep 17
Day Trading Guide for Dummies - 22nd Sep 17
Short-Term Uncertainty, As Stocks Fluctuate Along Record Highs - 21st Sep 17
4 Reasons Gold is Starting to Look Attractive as Cryptocurrencies Falter - 21st Sep 17
Should Liners Invest in Shipping Software Solutions and Benefits of Using Packaged Shipping Software - 21st Sep 17
The 5 Biggest Bubbles In Markets Today - 20th Sep 17
Infographic: The Everything Bubble Is Ready to Pop - 20th Sep 17
Americans Don’t Grasp The Magnitude Of The Looming Pension Tsunami That May Hit Us Within 10 Years - 20th Sep 17
Stock Market Waiting Game... - 20th Sep 17
Precious Metals Sector is on Major Buy Signal - 20th Sep 17
US Equities Destined For Negative Returns In The Next 7 Years - 3 Assets To Invest In Instead - 20th Sep 17
Looking For the Next Big Stock? Look at Design - 20th Sep 17
Self Employed? Understanding Business Insurance - 19th Sep 17
Stock Market Bubble Fortunes - 19th Sep 17
USD/CHF – Verification of Breakout or Further Declines? - 19th Sep 17
Blockchain Tech: Don't Say You Didn't Know - 19th Sep 17
The Fed’s 2% Inflation Target Is Pointless - 19th Sep 17
How To Resolve the Korean Conundrum  - 19th Sep 17
A World Doomed to a Never Ending War - 19th Sep 17
What is Backtesting? And Why You Need Backtesting System? - 19th Sep 17
These Two Articles Debunk The Biggest Financial Nonsense I See In The Media - 18th Sep 17
Bitcoin Price Crash 40% In 3 Days Underlining Gold’s Safe Haven Credentials - 18th Sep 17
The Sum of Risks – Global, Strategic, Political, and Financial - 18th Sep 17
The Netflix Of Canada’s Cannabis Boom - 18th Sep 17
Stock Market Sentiment Speaks: Either You Learn From The Events Of The Past Week, Or You Are Hopeless - 18th Sep 17
SPX 2500 … At Last! - 18th Sep 17
Inflation Lies, Lies and OMG More Lies - 18th Sep 17
How to Choose right Forex Trader? - 18th Sep 17
Who Has Shaped the World the Most? The Dozen Greatest Achievers - 17th Sep 17
Riding the ‘Slide’: Is This What the Next Stocks Bear Market Looks Like? - 17th Sep 17
Gold Up, Markets Fatigued As War Talk Boils Over - 17th Sep 17
Predicting the Future of the U.S. and the World - 16th Sep 17
Deceit in the Financial Food Chain - 16th Sep 17
Gold GLD ETF Investment Resuming - 16th Sep 17
Extreme Weather & Energy Markets: What's Next? - Video - 15th Sep 17
Trump’s Path to IP Wars - 15th Sep 17
GBP USD Approaches Fibonacci Target - 15th Sep 17
Higher US Interest Rates May Force Higher Inflation Rates - 15th Sep 17
Stock Market Investors: Taking the Road "Less Traveled" Has Its Perks - 15th Sep 17
The 3 Best P2P Lending Platforms For Investors In 2017—Detailed Analysis - 15th Sep 17
The US Debt Bubble Will Soon Warrant Serious Measures - 15th Sep 17
Why it is Often Difficult to Sell a House Fast - 15th Sep 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Too Much Capital

Stock-Markets / Economic Theory Jul 17, 2017 - 05:02 PM GMT

By: Submissions

Stock-Markets

Henri Schneider writes: Truisms and banalities: Investors must be able to assess the productivity of their capital. This is done by comparing returns to interest rates. But what, if all interest rates are rigged? What if they are artificially lower than they should be? Then, not only too much capital is invested, but it is invested in the wrong places. Even more pressing: what if there is simply too much capital in the financial system?


For sure, financial markets are up, investors are happy, politicians – central bankers just being a peculiar type of politicians – enjoy the merriment. But the population of question marks regarding the actual cycle is also increasing.

Is there real investment appetite in financial markets or is the upward trend a function of cheap central-bank money? Is a bull-cycle of roughly 7-years the fruit of higher productivity or a result of central-banks unwillingness to raise interest-rates? Is it the nature of development that tech assets and internet companies have higher valuations than those firms that produce stuff an employ people?

For sure, all these question marks have always been there. And they will always be. But keep in mind that in the cycle before the 2007-09 crisis, a similar discussion took place. Low interest rates that remained for an overly long period of time; cheap money created and circulated by central banks; and the built-up of capital in asset classes that turned out to not to be the ones that mattered – these were all features of the 2000s bull-cycle.

Back then, no person of sane mind would question the pace of globalization. No one would dare putting a question mark behind housing. Not even the craziest would contest the financial engineers’ ability to build products. Even the diehard atheists were convinced of the god-likeliness of the Chairman (of the Fed, that is).

Today, many of the same question marks remain but can be applied to different trends, sectors and skills. The trouble is twofold. First, there is too much capital in the system. The more capital there is and the more this capital deviates from the natural investment stock, the harder is the landing. Once market-agents realize that they were valuating a capital stock much higher than the real demand for that stock is, its value implodes – crisis. Second, the more this capital-stock deviates from the natural preference for capital or assets, the longer it takes to correct this misallocation – long crisis.

Granted: The “natural” investment stock and the “natural” preference for assets seem difficult to find out. But “natural” means nothing more than what market agents would do if there weren’t interventions from central bankers pouring money into the system and lowering interest-rates. “Natural” is only what agents would do if they were to choose freely, invest per their own risk-budgets and with their own money. All of these three are currently hindered by monetary policies.

Truisms and banalities? Of course. When investors use their own money, act per their individual risk-budges and choose freely, the risk of financial crises is considerably lower. Even if they hit, markets can shake off the effects of by themselves quickly. However, the next crisis is born when central banks meddle either by keeping interest rates low or by creating too much capital. Both of them being done right now.

Henrique Schneider is the chief economist of the Swiss Federation of Small and Medium Enterprises and board member in different funds and asset managers.

New Books
Mehr als Helden: Menschen; Portrait überraschender Liberaler
https://tinyurl.com/yceyvhpr

Uber: Innovation in Society
https://tinyurl.com/ycljdjwb

Creative Destruction and the Sharing Economy
https://tinyurl.com/y7apcebg

Indifferenz, Gegnerschaft, Identität: Veränderungen im politischen Verhältnis von Dorf und Staat im Kosovo
https://tinyurl.com/y8yzhlhd

Copyright © 2017 Henri Schneider - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife