Greg Ip and Mark Whitehouse in the Wall Street Journal begin a series of articles on the perceived oversupply of capital sloshing around the globe. This is an interesting article in that it has global implications for nearly every asset class.
There’s an unprecedented wave of capital flowing around the world, with all of its owners anxiously searching for a better return. World pension, insurance and mutual funds have $46 trillion at their disposal, up almost a third from 2000…
The result is that global investors are diving into a wide range of riskier assets: emerging countries’ stocks and bonds; real estate and real-estate-backed debt; commodity funds; fine art; private-equity funds, which buy stakes in nonpublic companies; and the investment contracts called derivatives, including a kind structured to permit the sophisticated to take huge bond risks.
The authors note that this so-called ‘Savings Glut’ is somewhat paradoxical considering the fact that the U.S. has become a wasteland of savings. Whereas the rest of the world goes on savings despite the low returns available on most cash instruments. The rest of the article focuses on the effect this excess savings has on various asset classes.
“People talk about a wall of money everywhere,” says Peter Fisher, a former Federal Reserve and Treasury official who’s now a managing director at BlackRock, a New York investment company. “Bankers talk about too much money chasing deals. Private-equity funds talk of money chasing them. And buyers of corporate and asset-backed debt seem to come at the bond market from all directions.”
In general analysts believe that the risk premia on most asset classes are unusually low. In short, investors are not receiving much bang for the buck, i.e. return for the risks taken. Unfortunately it does provide investors with a bit of a dilemma. Either stand aside waiting for better investment opportunities, or risk losing out in the meantime.
… the concern is that, historically, very low risk premiums often presage a broad market decline that pushes down stock prices and pushes up what everyone must pay to borrow, hurting economic growth. “History has not dealt kindly with the aftermath of protracted periods of low risk premiums,” Fed Chairman Alan Greenspan noted in August.
As investors pile into riskier assets and their prices rise, they generate impressive returns for those who own them and attract still more investors. Cautious money managers who play it safe and stay on the sidelines run the risk of showing embarrassing low returns, and losing clients. Most choose to stay in the game.
There is no way to predict when and if this economic phase of ‘excess savings’ will end any time soon. But many believe that it will end with some of macroeconomic accident. It could be set off by a rapid rise in short term interest rates driven by central bankers trying to quell incipient inflation.
Some economists and policy makers say that risk premiums are bound to rise, which means many asset prices, from corporate bonds to real estate, would likely fall. No one is sure what the trigger would be. It’s often something unexpected that investors haven’t incorporated in their forecasts. It could be that although many companies today are highly profitable and able to service their debts with little trouble, rising oil prices could hold back global growth and impair corporate creditworthiness
Absent a quick macroeconomic accident, the Saving Glut is going to be with us for some time to come and is already having worldwide repercussions. Even though this WSJ article is the first of a series, they are not the first to publish on the topic.
Barry Ritholtz at the Big Picture has a series of links commenting on the Savings Glut meme. Ritholtz believe that the notion a savings glut is somewhat self-serving on the part of Americans in that it implicitly endorses our worst habits: low savings and high expenditures.
The Savings Glut argument is a defense of a structural imbalance via a mostly painless solution, rather than the difficult medicine (most adults) know are necessary to cure the problem. A spoonful of Sugar won’t help eliminate the problem.
The implications of the Savings Glut are many. You can read our post on the effect the Savings Glut is having on one set of asset managers, hedge funds. These funds have been the recipients of much of this global capital. So much so that some analysts believe that this capital may be too much of a good thing for the hedge fund industry.