What´s the easiest job in the world?
Selling financial products to investors has got to be up there. It´s just got to be one of the most captive markets in the world. Your customers just keep coming, no matter what, no matter what you are selling, no matter if they happened to go broke just three months before. Or as Tony Soprano would put it, “Degenerate Gamblers!”.
We are in the midst (again) of one of the most frantic manias financial markets have ever seen. Stocks are reaching all time highs, rich (and not so rich) country bonds trade at record high prices, so do corporate bonds, so do junk bonds, weird bonds (Rwanda, CoCos) are being wildly wildly oversubscribed. Even Ireland and Portugal, apparently hopeless cadavers just a few weeks ago, are selling securities again.
What´s behind all this? The conventional line is “search for yield”. Official policies are, once more, keeping official interest rates so low that one is forced to venture into adventurous territories to earn a bit more than nothing. Remember Subprime CDOs? Same storyline.
But I suspect there´s more to it. Financial markets offer people (many of whom may have less than exciting lives) the unique chance to play and to feel like a player. What´s more glamorous than going into a dinner party and proclaim that you just bough Rwandan bonds? What can make you look more savvy and in-the-know as walking into your high school reunion waving some of the new Apple bonds? What can make you look more impossibly sophisticated to your golfing pals than, off-handedly and in between the 17th and the 18th hole, letting it be known that you hold a sizeable chunk of Barclays Additional Tier 1 CoCos?
Financial markets allow you to spend your day checking prices and news updates on your BlackBerry. Even better, it allows you to do so in front of others. You can always do that with plaid stocks, of course. But why not add some glamour and exoticness into the mix? And certainly the promised higher returns help, though those are now becoming perilously lowish.
In a Soprano episode, a childhood friend of Tony´s is desperate to enter the high-stakes poker game that the Family runs. Tony repeatedly warns him against it, given the potential downside. Eventually, Soprano gives in, as his friend beggingly crawls to his feet. Predictably, and after the initial high, the friend loses it all (business, home, car) and is forced to abandon his family and move somewhere far away.
Today´s investors are similarly begging in desperation at the feet of the investment banks that underwrite and design the fancy high-stakes securities. Many may be amply aware of the likely fate awaiting. And yet, they keep crawling. And crawling. And crawling.
Capital preservation is just not, and will never be, as sexy as North Korean bonds.