60 Seconds. Slack Money, the hunt for yield & over-building:
Interest rates last rose over 10yrs ago (on 5 July 2007). Slack money got us through the worst of the aftermath of the Credit Crunch but where’s the road back?
Written by Mark Brumby
Getting the balance right:
- We didn’t want the financial world to end in 2008
- Hence, we cheered when the Bank of England (and the Fed, ECB etc.) turned on the money tap
- But here we are, ten years later, wondering what’s ‘normal’
Bond yields down, any old investment beats its (non-risk adjusted) cost of capital:
- Capital, which has pronounced, lemming-like tendencies, has sought yield.
- Spreadsheets have shown returns of 15%, 20% or whatever against a marginal cost of capital, almost always debt, of perhaps 3%, 4% or so
- Sure, these were leasehold assets but hey, a return’s a return
- Until it isn’t, of course. But the music’s playing, you gotta dance…
- Why not max out on new-builds, accept lower returns etc.?
- Now we have a coffee shop on every corner and retail parks, which should have supported 4-6 F&B outlets, are saddled with 12, 15 or 20
Maybe we were living in a bubble:
- Well, back up a bit. This is not a world without risk.
- Consumers could over-borrow, could see falling real wages & lose confidence
- They may be squeezed by inflation, may hear talk of possible r-r-r-r-rate increases
- Leaving some operators (see earlier ‘Nought to Sixty’ piece), naked when the tide goes out
- Over-expanded players could stumble and collapse at the first hint of tougher times
- Margin-driven operators, perhaps lazy & entitled, may struggle with the new reality
- But relevant operators selling the right product to the right customers at the right price from the right units, will still prosper
- Sound easy? Well, yes, but try it yourself sometime…