Three years ago equities and property were moving up in tandem, a continuation of the trend since 2003 . By this time, all other tradeable capital assets worldwide, equities, property, commodities, also moved as one, all charts looked the same. Anything sold because it looked over valued continued to move up at the same pace as its replacement.
In the mid 1990s the Japanese Central Bank cut interest rates to 1%. Borrowing at around 1% and investing in average yielding investment assets would have provided an automatic 4-5% gain, a license to print money were it not for the potentially ruinous exchange rate losses if the Yen moved against your invested currency. There was a solution though.
Set up and manage an unregulated investment fund. Use smoke and mirrors and nonsensical jargon to give the impression that what you were doing was ultra sophisticated and highly skilled and call it a hedge fund. As manager you would take 20% of any profits the fund made over a modest bench-mark. Should there be losses, the fund i.e. your investors, would bear 100 % of them, but you would still take a 2% management fee. Only your investors could lose. A perfect vehicle for the perfect trade, gambling other peoples money on terms where you win very large if your bets come right, but only win a little if they don’t.
In the ensuing years hedge funds proliferated, and the Ponzi nature of their collective activities resulted in spectacular profits for their managers.
At the end of 2006 worldwide asset prices seemed precipitously high, driven up by the carry trade and liquidity bubbles blown from the shadow banking system. In trying to identify a safe haven investment asset which had not inflated like all the others, German residential property caught my attention.
I decided to invest in German residential property, which was relatively cheap on two counts, the Euro was undervalued against Sterling, and the German property market had gone nowhere for 15 years.
In 1992 an average apartment in London would have ‘bought’ .7 of an equivalent one in Frankfurt, but by 2006 that same London apartment had become worth 2 of the Frankfurt apartments. This was the result of the appreciation of Sterling against the Euro, combined the effects of an inflated property market in the UK, and a static one in Germany.
Anyone fully invested since the March lows this year is now be sitting on a 60- 100% gain. Time to sell maybe, but the question of where to store the value created also arises again. And once again, with all asset classes inflating in unison, I have begun searching a new un-inflated lifeboat.
If only there was a bank on Mars.
Trevor E Brown's Blog 