Submitted by Taps Coogan on the 25th of October 2019 to The Sounding Line.
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Diego Parrilla, Managing Partner of Quadriga Asset Managers and author of the ‘Energy World Is Flat’ and ‘The Anti-Bubbles’, recently spoke with MacroVoices about the massive bubble he sees in financial markets. In a wide ranging interview, Mr. Parrilla describes the various excesses in bond and equity markets, what is driving them, and how investors are mistaking the equivalent of insurance premiums for actual investment income. Or as he puts it, we are ‘going from risk-free interest to interest-free risk.’
Some excerpts from Diego Parrilla:
“Once upon a time, we would go to the market and say ‘I want to take ‘X’ amount of risk. How much will you pay me for it?’ We are in a situation now where we say ‘Listen I want my 5%. Tell me what I need to do.’ And what we’ve done is really take incremental risk in each and every dimension you can think of. The first one is… term premia, the bubble in duration, fixed income, government bonds, lending for longer and longer for lower and lower yields. We’ve seen 30-Year Bunds now negative. We’ve seen this thirst for duration with 100-Year Austrian bonds… I would argue that this is the epicenter of the problem, but not the problem itself. Things start really going wrong with the second dynamic which is credit risk premium. Obviously, with negative yields in AAA bonds, we are going down the chain. Next is investment grade, next high yield and emerging markets, lending to weaker and weaker credits for longer and longer for lower and lower yields and creating what I think is a major bubble across a spectrum of high yields and zombies and everything else…”
“People are selling short volatility strategies in multiple ways and disguising them as income strategies. It’s very different if I own a house in Miami and I rent it. What I collect is, indeed, income. But if I am selling hurricane insurance on your house, what I collect is not income. It is insurance premium at the expense of insurance liability…”
“These two forces, the central bank put and the search for yield, are sort of feeding on each other. This complacency, this financial bullying, this desperation for yield, is leading to what I would summarize as ‘from risk free interest to interest free risk.'”
“Too big to fail takes different forms. In 2008, it was all about the banks. It was all about (countering) the systemic risk of Lehman… But the reality is that ‘too big to fail’ is now a much broader term. We’re talking about China being too big to fail. We’re talking about the duration bubble being too big to fail. We’re talking about the zombies in Europe being too big to fail, which means you can’t hike rates. We’re talking all these massive bubbles that we’ve built that go way beyond institutions… The reality with too big to fail is that they simply cannot fail and as a result they will be transformed… I would argue that all these years of money printing and debt haven’t really solved the problems. All we’ve done is delayed, enlarged, and to a certain extent transferred these problems across currency wars, beggar-thy-neighbor… We are going to see very very preemptive central banks all over the world, sending rates to zero, including the Fed, paving the way for massive fiscal expansion and debts and MMT that will never be paid back… and we clearly have a problem medium term, longer term of inflation…”
There is much more to the interview, so enjoy it above.
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