Doubts are growing as to the ability of central banks to maintain the stability of the world economy and investment markets. Does it matter?
Regular readers might recall that a small number of years ago we said the single plank holding up investment markets was action by central banks (in particular the Federal Reserve in the US). It wasn’t just about (almost) zero interest rates and money printing (quantitative easing, or QE). There was also confidence that at the first sign of trouble (in markets) central banks would step in and save the bankers the day.
This has led to quite a few absurdities. If we said to you “give us your money and we will guarantee to lose you money” you would rightly run a mile (with your money). In Japan a recent issue of 10 year government bonds had a negative yield – investors in these bonds agreed to pay the government money, not the other way around!
This is The Age Of Absurdity
The apparent emphasis on supporting those that have (conveniently pigeon-holed as “The One Per Cent”) has not been lost on the 99%. Yet this has been going on for a long time. Real wages for most in the US have not increased for more than two decades. In Europe the electorates have more obviously begun to revolt in recent years. In the UK… well you don’t need me to tell you.
And central banks began supporting markets rather than focusing on the broader economy from the time of the 1987 Crash, thanks to Alan Greenspan (then heading the US Federal Reserve).
The lack of global (let alone national) leadership is worrying. Such vacuums tend to be filled with unexpected – if not also extreme – outcomes.
Such leadership as we have is provided by unelected central bankers, who continue with an extraordinary experiment, where the evidence to date is that it has failed (but for providing a very necessary cushion in 2008/9). To be fair to the central bankers, they did not embark on this career path to become backdoor dictators – yet in the absence of leadership from elected politicians, their sole option is enshrined in the mantra “if it doesn’t work, it must mean we need to do more of it”.
This is what happened yesterday, with the announcement from the European Central Bank (ECB) of lower (negative) interest rates and more QE. Though the ECB did more than expected (getting desperate?) the market reaction was very uncertain, at least initially. This reflected that doubts are certainly growing as to the ability of central banks alone to underpin markets.
Yet the world still spins.
Debt grows, populations age, and politics polarise throughout much of the developed world. But real people get on with their lives – going to work and running businesses – and as a result investment opportunities persist.
In fact we observe growing numbers of opportunities, and these are in more detail in the latest TopFunds Guide and our 2016 ISA Guide (do request copies if you haven’t already).
We can get on our soap box about some of those issues (and we do!) But we must also be able to look behind and beyond the ranting headlines, and bring those opportunities to you.