The financial cycle is turning down. Ray Dalio of Bridgewater explained the financial cycle using the Monopoly® game as an analogy in this note.
If you understand the game of Monopoly®, you can pretty well understand credit and economic cycles. Early in the game of Monopoly®, people have a lot of cash and few hotels, and it pays to convert cash into hotels. Those who have more hotels make more money. Seeing this, people tend to convert as much cash as possible into property in order to profit from making other players give them cash. So as the game progresses, more hotels are acquired, which creates more need for cash (to pay the bills of landing on someone else’s property with lots of hotels on it) at the same time as many folks have run down their cash to buy hotels. When they are caught needing cash, they are forced to sell their hotels at discounted prices. So early in the game, “property is king” and later in the game, “cash is king.” Those who are best at playing the game understand how to hold the right mix of property and cash, as this right mix changes.It is curious that in the markets the individual needs to do the opposite to the masses. It seems artificial and counter-natural.
In 2007, Spanish Banco Santander (SAN) financed the purchase of the Dutch ABN Amro by selling convertible bonds to credulous investors. The convertibility into common shares was due to September (or October or November, I don't remember very well, and I lost the source, sorry). It seems that most of the investors have waited for the convertibility and have not liquidated their positions. My point is that, even though not even the analysts of SAN knew what was coming, they had predicted a low cycle for late 2012, and the offer was to convert the bonds into shares for that date, when they expected the share price to be really low (at a little over EUR4), while the average investor extrapolated the 2007 price of more than EUR14. It seemed like a good deal. A smart bunch of motherfuckers they are.
We would do very well in spending some time with our kids playing these kind of games. The concepts are learned deep in our neural systems and they will be able to extrapolate when they grow up. This way, they won't end up becoming cheap financing sources for big banks.