Awash with cash. How the investment world is feeding upon itself

Australia Broadcast Center

a day ago

The tremors rumbled across Wall Street again last week, sparking concerns that the much-anticipated correction could be afoot.
This time it was poor jobs numbers, adding to concerns the economy was cooling, and coming on top of a tumultuous fortnight of furious tariff negotiations with key trading partners including the European Union and Japan.
Fears of the tariff impact have been building for months.
Debt markets have remained on edge that the sharp increase in American tariffs would hit global growth, and fretted as to whether they would provide a one-off boost to inflation or have a more lasting effect.
Stock markets, by contrast, have blithely shrugged aside all concerns and headed for the Moon.
Since the meltdown in April immediately after US President Donald Trump unveiled his "liberation day" tariffs — when stocks plunged headlong into correction territory — they've regained all the lost ground and bounced back to new records.
By the end of the first week in April, the Dow Jones Industrial Average had shed an incredible 19 per cent from its February peak.
At any other point in history, the speed of that recovery would have seemed inconceivable.
But you only need to hark back to 2020 in the early days of the pandemic when stock investors took fright and headed for the exits en masse.
The crash, as harsh as it was, turned positive in record time. Within weeks, it had bounced off its lows and began an extended recovery. There was no vaccine, almost the entire global economy was in shutdown mode, and normal life was in suspension.
Why? Unlike previous periods of instability, there is one distinguishing feature of the global economy right now.
The world is awash with money. Cash is desperately seeking a home. And that is keeping asset prices buoyant on everything from stocks to real estate and bonds.
How long can it last? Until something breaks.
The end of the financial year usually brings about some kind of reckoning. It's the time when corporations open the books, declare their earnings, and deliver some guidance on how they see the future.
Right now, there is an almost universal belief that stock markets are overcooked, that they've been soaring so high for so long, they are dangerously close to the Sun.
Australian stocks are trading at about 20 times the value of their projected earnings. That's not quite a record. The value was higher in the aftermath of the pandemic. But it is well above the long-term average of 15 times earnings.
Wall Street, on the other hand, is trading at more than 26 times forward earnings. And most of that extreme valuation is captured by just a handful of companies, the seven technology giants that are betting big on artificial intelligence (AI).
Nvidia, the chip maker that has assumed the mantle of the world's most valuable corporation, is trading at more than 56 times its projected earnings.
These lofty valuations, and the relatively tiny pool of corporations driving global stock markets, has many seasoned veterans fretting about the potential for a violent drop.
Their fears are well-founded. Global stocks are extremely vulnerable to external shocks, and the world has no shortage of unpredictable leaders right now.
But the graph below — the extraordinary almost exponential growth in US money supply — highlights a conundrum for big investors.
Even In the event of some unforeseen event, what should they do with all the cash?
US money supply
The above graph is replicated across the developed world, in Japan, Europe, China and elsewhere.
It began when money markets were deregulated in the 80s, sparking a surge in borrowings by corporations, households and government.
It gathered pace in the new millennium when central banks realised they could override recessions with endless amounts of stimulus via low and, in some cases, negative interest rates.
And now America is embarking upon a government-inspired, debt-fuelled spending spree that will inject even more cash into the system to chase a limited number of investment opportunities.
We're playing our own part in this dangerous game. Our superannuation giants are so big, they have begun to outgrow the local market.
With close to $2.9 trillion in funds — and cash flooding in each week — it's becoming increasingly difficult to find an investment target to which they're not already overexposed.
The biggest funds such as Australian Super, Aware Super and the Australian Retirement Trust, have reached the limit on how much they can invest here, and now, increasingly, are looking offshore.
Right now, there's only one real investment theme that's attracting global funds and that's AI.
The AI race has driven Wall Street to incredible heights but has sucked vast amounts of global funds into its orbit, and by extension, into the orbit of the handful of companies spearheading the AI revolution.
The so called Magnificent Seven tech companies have so dominated Wall Street's performance, they've left the other 493 companies in the S&P500 in the dust with only average returns.
Australian investors, courtesy of the country's super funds, have been heavily invested in this for years, and hugely exposed should anything go wrong.
While some critics hark back to the 2000 tech crash as the internet boom turned into a bust, there are significant differences.
Rather than loss making operations selling dreams about future earnings, this boom has been generated by hugely profitable corporations.
Nonetheless, it is a gamble with vast and ever increasing amounts of capital being poured in, particularly by Amazon, Alphabet, Microsoft and Meta. Close to $US400 billion ($617 billion) is being earmarked for new investment for the next year alone.
DeepSeek, the Chinese upstart that emerged back in February was the investment world's jolt of reality, at least on the technology front.
But like all the other shock waves of the past five years, the downturn was brief, muted by the flood of investment cash sprayed across the tech giants.
There are serious concerns about America's role and reputation in the global economy, with the White House calling for the removal of the US Fed chief Jerome Powell and the brutal ousting of the chief of the Bureau of Labor Statistics when last week's jobs numbers disappointed.
Others point to the real economy, for an outbreak of inflation or a serious slowdown in growth that may skittle the great stock market boom.
But the biggest threat may come from a familiar, albeit left of vision, source.
So far, the big tech firms have been funding their stupendous capital investment programs with shareholder funds. That now appears to be shifting and many now are looking to use debt.
Private equity groups are refashioning themselves as bankers and becoming ever more skilled in the art of raising debt under the radar and with the usual oversight of regulators.
The emergence of debt adds a whole new layer of risk to an already volatile situation.
While the promise of AI so far has delivered, at least according to the big tech group's earning in recent weeks, there is always the threat that their spending — particularly on data centres — could end up horribly overdone.
Investment busts have a habit of recurring every decade or so and, while painful, often are considered necessary. Once they infect banking and lending markets, that pain usually is magnified.
And if we've learned anything from the events of 15 years ago, the architects usually are swept to safety.