“I see a clinic full of cynics, who want to twist the people’s wrist. They’re watching every move we make, we’re all included on the list. The lunatics have taken over the asylum…” – The lunatics (have taken over the asylum) by Fun Boy Three.
The 1970s was a fantastic decade for the horror film aficionado. It was the era that, among others, gave us The Exorcist, Jaws and The Omen. But as a child my personal favourite was an Amicus production penned by Robert Bloch, the author of Psycho. It was called Asylum.
Robert Powell plays a doctor interviewing for a job at a secluded hospital “for the incurably insane”. His task is to assess which of four patients is the former head of the asylum who has lost his (or her) mind.
Is it Bonnie, who murdered her lover’s wife? Or Bruno, the tailor who was asked to make an elaborate suit apparently capable of re-animating the dead? Could it be Barbara, whose best friend Lucy may or may not be a figment of her imagination? Or is it Dr Byron, who is making tiny mannequins that he thinks can be willed into life?
I won’t spoil the ending. But I mention the film because we seem to be entering a financial environment in which investors have completely lost touch with reality. Who best represents the insanity running through the capital markets today?
The candidates
One candidate is Carmine ‘Tom’ Biscardi. In January, The Wall Street Journal reported that Mr Biscardi was in the process of launching a $3m initial public offering to raise money for a search for Bigfoot. (In 2008 he held a news conference announcing the discovery of the legendary beast – which turned out to be a rubber gorilla costume.)
Another candidate is The Grilled Cheese Truck Inc. This company has a total of four grilled sandwich delivery trucks and, as Bloomberg reported in February, operates across Phoenix, Arizona and Los Angeles. Striding the gourmet grilled cheese sandwich market like a veritable colossus, the company now trades on America’s OTCQX market with a capitalisation of $108m.
A third candidate for bubble zeitgeist is Jacob Wohl. Mr Wohl, like many Americans, runs a hedge fund. Wohl Capital Investment Group’s tagline: “Some people dream of success. We make it happen.”
His website shows his extensive (and as sceptical spoilsport Mark Melin of ValueWalk points out, apparently unaudited) track record, having wiped the floor with the S&P 500 index since, erm, the start of January. Unlike most hedge-fund managers, Jacob Wohl (also known as the “Wohl of Wall Street”) is only 17 and still at high school.
Getting paid by the bank
Our fourth suggested epitome of a financial world gone mad is a little closer to home. Eva Christiansen is a Danish sex therapist (so clearly conforming to all of the best stereotypes about our Scandinavian cousins) who has just taken out a small business loan from her bank. The interest rate on her loan is minus 0.0172%. Her bank is paying her interest of a little over a dollar a month on her loan.
The flipside of her good fortune is revealed by her countrywoman Ida Mottelson. Ida’s bank just wrote to her advising that it was now charging her 0.5% to hold her money on deposit.
Biscardi, Wohl and Grilled Cheese Truck Inc are isolated instances of an alarmingly frothy market – the sort that enables the flakiest of ventures to be floated and that turns high-school students into hedgies. But Christiansen and Mottelson represent something far more disturbing. The world of capital has been turned completely on its head. Banks pay you to borrow money from them, and punish savers.
One of the most compelling parables in economics is Frederic Bastiat’s “broken windows” fallacy. In the abbreviated version, a boy breaks a window, a crowd gathers, and people begin to marvel at how the glazier will come into a windfall. Perhaps all windows should be broken in order to trigger an economic boom? Bastiat’s essay is titled What is seen and what is not seen. Weird financial experiments have unforeseen and unforeseeable consequences.
The Austrian school of economics calls some of these unforeseeable consequences “malinvestments”. It was malinvestments – bad financial decisions leading to terrible economic outcomes – that led to the financial crisis. It seems unlikely that malinvestments will lead us out of it.
The markets are now agonising over whether and when the Federal Reserve and the Bank of England (BoE) will raise interest rates. BoE economist Andy Haldane has even suggested that the next UK move might be a rate cut. If interest rates at 5,000-year lows aren’t enough, perhaps we should cut deposit rates to minus 100% and see what effect that has on savers’ confidence.
• Tim Price is director of investment at PFP Wealth Management. He also writes The Price Report.
Category: Market updates