Risk? What Risk?

US stock markets, like junk bond prices, are sitting near record highs...

 

PARTY LIKE it's 1986 people! urges Dan Denning in The Daily Reckoning Australia.

 

The S&P 500 is just a few pips off its all-time closing high, hit a month ago on July 3rd at 1,985 points.

 

'Unrestricted warfare' in the skies of Ukraine? So what! Ultra-low global interest rates producing anaemic real growth? So what! Geopolitics as a factor in stock market valuations? So what!

 

Markets are treating risk like its cotton candy. Emerging market sovereign debt issuance was up 54% in the first six months of this year compared to last year, according to data from Thomson Reuters. Led by the likes of Mexico, Slovenia, and Turkey, governments in emerging markets are taking advantage of low interest rates to stock up on cash. Global investors have scooped up almost $70 billion in emerging market sovereign bonds so far this year.

 

Is this the new frontier of investing our colleague Kris Sayce is talking about? I doubt it.

 

Kenya's government issued $2 billion worth of bonds in June. The offering was over-subscribed. Ecuador – a country that defaulted on its sovereign debt in 2008 – sold $2 billion worth of bonds in June as well. That offering was also over-subscribed.

 

It's not just emerging market sovereigns either. The so-called developed markets issued $157 billion in new debt in the first half of the year. And that number doesn't even include Chinese government debt, which is not yet traded in international markets.

 

Are you starting to get the picture? A low interest rate world leads to risk-taking behaviour by investors. That's exactly what you're seeing right now in the S&P 500's performance and the demand for emerging market bonds. I'd tell you to be alarmed. But don't take my word for it.

 

Billionaire investor Jeremy Grantham says the next bust will be 'unlike any other'. He told the New York Times that US Federal Reserve Chairwoman Janet Yellen is 'ignorant'. He's preparing for the crash. Yellen's rally may lead to new highs in the US. But from there?

 

Even Reserve Bank of Australia governor Glenn Stevens concedes there is only so much you can do with low interest rates. You can blow an asset bubble. But you can't make a business borrow. "If people simply don't wish to take on new business risks, monetary policy can't make them," Stevens told a gathering last month.

 

Stevens also suggested that the RBA's next rate move could be a cut. That's if the non-mining part of the Australian economy doesn't get off its lazy backside, increase productivity, and start creating jobs and profits. A rate cut might take the steam out of the Aussie Dollar. But it barely budged in reaction to Stevens' comments.