The Dash For Trash

Here's the latest from our Highly Placed Professional.

A fool and his money are easily parted - or so goes the mantra. The funny thing is that there may well be quite a lot of fools who become reunited with their money this year, as markets have zoomed back up after the mother of all bull corrections. I mean, if you didn't panic and sell everything last year, you only had to sit back and wait, and your investments moved up. That is, of course , if you actually have investments. In our debt laden society I sometimes wonder just who does any business with the banks these days except those with massive mortgages and credit card debts.

But before I digress too much, let's look at the euphemistically termed 'Dash for Trash'. You may remember when the crisis hit in the summer of 2007, there was a 'dash for cash' - the idea being that in times of zero liquidity, it's probably best to get your hands on real money and not worry too much about investments. At least with cash in your pocket, so they say, you won't lose that much (especially when interest rates are at record lows).

Now, the great and the good of the investment world are getting all hot under the collar about the polar opposite of that cash trade - and that is the 'trash' trade. So what are they talking about ? Well pretty much anything that gives you a half decent yield, of course. This's why corporate bond deals are being swallowed in one great big gulp as they come to market. Private banks buy them to sell on to investors or plonk them in their own funds. Fiat came out the other day with a deal that 'didn't touch the sides' in market parlance, and indeed was oversubscribed. But when you think about it, is Fiat or anyone else in our global corporate world really in any better shape than 2 years ago ? Ask anyone in the know, and they will tell you that the current improvement in economic activity is mostly down to government stimulus packages and fiscal policies. The consumer, my friend, still ain't spending. What will happen to all this debt (and all those overpriced stocks), then, when economic reality sets in ? You work it out.

They always say that the market has a short memory. For me, it's more a case of memory being wiped clean. Investors are diving into China, Mid East, BBB and sub investment grade credits, mortgage backed bonds - in fact many of the very-same products that got us into this mess in the first place. And the rationale ? Well, yields are too low and you have to put your cash to work somewhere!

I promise you that I am not getting all sanctimonious here. I clearly want the markets to stabilise (and banks to return to sustained profitability), and I want your homes to go back up in value. But doesn't it seem a bit strange that we've gone from the investment abyss that was a year ago, to a place now where anything seems to go ? Although it's good to have a nice warm, fuzzy feeling in the run-up to Christmas, we should dust off the Alan Greenspan phrasebook and look up 'Irrational Exuberance'. There's a lesson there somewhere!

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