The Secret Broker: The milky bars are on me!
The Secret Broker
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In this month already, more interest rate related records keep falling, as this crazily low interest rate cycle that we now live in just keeps partying on.
In the first week of September alone, more Global debt instruments were snapped up by investors over a three-day period, than in the whole of August.
In the US alone, $US72 billion ($104.7 billion) worth of bonds were issued in 45 deals, leading to a record total of $US140 billion worth of bonds, issued and settled between European and US companies and investors in just three days.
Can you imagine the smoke coming off a bond brokers biro, as they crammed in a whole months’ worth of deal slips in just three days? Takes vaping to a whole new level.
Even Superman investor Warren Buffet got changed in the phone box and came out and joined the party by issuing some Yen bonds into the Japanese market.
And Australia’s very own local ‘lad made good’ Fortescue, managed not to miss any cake, by issuing $US600m worth of bonds on a (rumoured) yield of below 4.2 per cent.
(For some reason they did not release the yield to the ASX).
Now, you only have to go back four years to appreciate what this means to Fortescue’s bottom line, as in 2015 they had to issue $US2.3 billion worth of secured bonds on a yield of 9.75 per cent, just to keep the doors open.
So, what’s all this really mean?
Well, if you go back to 1913, a $US100 bill would buy you $US100 worth of goods in America and today the exact same $US100 bill will now only buy you $US3.87 worth of goods.
As we humans all come and go, a person born in 1913 would be aged 106 today and so all of this knowledge slips away and as the new, young, slick broking bucks arrive on the scene, distant memories are well, just that.
So, to combat this memory loss, a clever economist came up with The Mars Bar index.
As a Mars Bar had not changed in shape, size and ingredients since 1932, he was able to calculate value by using the purchasing power of a Mars Bar, and we were taught this when we were valuing long-term portfolio performance (to justify our fees, if under performance was dared to be questioned, by a pesky client).
Using this index method, in 1940 to buy a Rolls Royce, you would have needed 204,000 Mars Bars and 66 years later, according to the index, 347,000 Mars Bars would be required.
This meant that a common Rolls Royce had outpaced your buying power by 58 per cent.
Unfortunately, Mars themselves turned pesky and changed the size and ingredients of a bar so the index no longer works.
Hence, they now use pretty models with very small hands in all their advertising, to keep the illusion but not the index going.
However all is not lost, as in 1986 The Economist took this index thinking to a more modern level and launched The Big Mac index.
They used the price of a Big Mac to calculate the real cost of living in different countries.
In 2018, for example, $US50 would get you 7.6 Big Macs to munch on in Switzerland, whereas in Egypt, you would need a wheelbarrow to collect your 28.6 Big Macs (an Americans backpacker’s form of Utopia).
So, what does all of this change in buying power equate to?
Well, to reach the same purchasing power that $US140 billion worth of bonds will get those companies today, they would have only needed to issue $US54.18m worth of bonds in 1913.
So much for savings accounts.
My calculator did not have enough noughts to work out how many Mars Bars you need to make up $US140 billion, though it did let me calculate that Andrew Forrest’s $1.24 billion 2019 dividend flow would buy him 256,728,778 Mars Bar share-bag’s at his local Cottesloe Beach IGA.
Hopefully this means that a knock on the Forrest family’s front door on this October’s Halloween night may require an Egyptian sized wheelbarrow and a customised costume incorporating the very latest in elasticated witch pants.
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