This morning, a piece of depressing news comes from the Oxford Dictionaries: "post-truth" has been declared "international word of the year". In truth, it is the international word of the year for English-speaking countries -- but perhaps I am being too pedantic.
Used as an adjective, "post-truth" is defined as "relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief".
The editors at the Oxford Dictionaries explain that the term's frequency of usage has spiked this year in the context of the European Union referendum in the U.K. and presidential election in the U.S.
Why do I find it depressing? Because I see its introduction in the respected dictionary as confirmation that the Orwellian way of thinking is alive and well, a little more than a quarter-century after communist dictatorships were overthrown in Eastern Europe.
For investors, the fact that people in two of the most liberal, market-oriented countries in the world felt that objective facts were less important than emotion and personal belief when deciding the future path of their country suggests that a lot of uncertainty lies ahead.
However, to some extent, they are used to it. Investors have been dealing with an atmosphere of make-believe ever since central banks have started to flood the markets with liquidity to arrest the global financial crisis of 2007-2009.
The liquidity, coupled with measures to rescue banks and other significant companies in the U.S. and elsewhere, worked in the sense that it halted the fall. On the flip side, it has created a world in which companies that perhaps should not have survived are still alive. This is a world in which central banks sent bond yields to artificially low levels, making it very difficult to price risk because they tampered with the risk-free rate of return. A "post-truth" world has existed in the markets for a while.
This world has allowed a series of dangerous myths to flourish, as investors crowded on one side of the trade. It's true that most of these myths appeared before the global financial crisis, but central bank policies at the height of it and afterwards have blown them up to huge proportions. Here are three that I believe are among the most dangerous:
-- China's growth will continue unhindered. The feast achieved by China, which became the world's second-largest economy in an incredibly short time by building shiny new cities, infrastructure and factories seemingly overnight, is admired by almost everybody.
Even though the Chinese markets are not fully liberalized and there are doubts over the Communist Party's statistics when it comes to the economy, Western investors are still eager to put money there. China is obligingly cracking open the door to capital inflows from the West, but investors should be aware that they are walking into a debt trap.
Data out of China are not reliable (not that it matters in this post-truth world, but old habits die hard, so I still care about little things like accuracy), but some estimates put its debt to gross domestic product at 240% and growing at between 15% and 20% a year. Chinese capital has been fleeing abroad as the renminbi has been depreciating.
-- Real estate is one of the safest investments. The issue of Chinese capital flight brings us to the second overblown myth, encapsulated in the English saying that "you can't go wrong with bricks and mortar." I argued in a previous story that China is blowing up a huge real estate bubble across the world.
That is visible especially in real estate hot spots. New York, London, Sydney, Vancouver -- in all these cities and others, Chinese and Hong Kong investors look to park cash "rescued" from China. Yes, there are capital controls that don't allow people to take out more than $50,000 a year, but in recent years the ways to go around these controls have increased.
The wave of Chinese investment in Western real estate has lifted prices in these hot spots and elsewhere. Many people have come to see property as the best investment and, especially in the U.K., treat real estate investments as pensions, counting on ever-rising property prices.
-- Debt is wealth. Because people faced the choice of either jumping on the property bandwagon or being left behind by skyrocketing prices, many of them borrowed eye-watering amounts. Rising mortgage debt is adding to other types of debt, such as student loans or credit card borrowing.
Taking the example of the U.K., a recent parliamentary report on household debt shows the ratio of household debt to income is at just over 140%. It is true that this is down from 160% at its peak in early 2008, but it was 97% in 1997. Imagine what an increase, even small, in interest rates does to such debt-to-income ratio.
It looks like investors are beginning to get worried about the levels of debt -- not necessarily household debt, but corporate and sovereign debt. After Donald Trump's election as president, U.S. 10-year Treasury yields climbed as investors sold off U.S. bonds, expecting that the government will borrow more to finance infrastructure investment. Yields rose in sympathy in the U.K. as well, and to a lesser extent in Europe.
These are just three of the big investment themes that have been taken for granted for a while in this post-truth world. But as Brexit and the U.S. election have shown, when most investors are crowded on one side of the trade, it's time to look at what's on the other side.
