By Hard Assets Alliance Team
By Shane Obata, Special Correspondent to the Hard Assets Alliance
The Greenspan put, the Bernanke put, the Yellen put, the Draghi put?
Easy money causes people to take risks that they otherwise wouldn’t. And the result is always the same—a boom followed by a bust. Will the retail investor ever learn? Probably—but it won’t last because the emotions of greed and fear are too strong.
Yes, there have been improvements in the global economy since the financial crisis. That said, the devil is in the details. Artificially low interest rates have been okay for the global economy and great for asset prices. But structural problems such as youth unemployment, corruption and fraud, a high cost of living and high taxes, aging populations, and excess debt still remain.
We can’t paper over these problems. If they’re not dealt with, then they’ll persist—and they might get worse.
As a result of central bank policies, saving your money no longer pays off. Interest rates are so low that it’s hard to rationalize leaving your money in a bank. To compensate for this, investors are buying all kinds of junk securities, such as government bonds issued by the PIIGS.
Today we’re going to take a look at Portugal specifically.
If people are buying its bonds, does that mean they’re optimistic about its future potential? Not necessarily. What it means is that they’re confident they’ll get their money back—regardless of the fundamentals.
Debt and Rates
Portugal’s total government debt outstanding fell from 2011 to October 1, 2013; however, debt as a percentage of GDP is still rising and has now reached 129%.
Even though it seems that the government’s financial health is deteriorating, the chart below shows that demand for Portuguese bonds sent rates down from over 18% in late January 2012 to less than 4% on August 11, 2014.
Click image to enlarge
Investors want to buy Portuguese bonds, but it seems like a dangerous bet.