Have central bankers destroyed free financial markets?
When I wrote in my introduction about how significantly things had altered in recent times, the relevance was most acute when discussing how central bankers had assumed for themselves the parts of headline-grabbing financial superheroes, in a role where to be unseen and unheard would be a blessed characteristic. Indeed, the creeping influence of central bankers and their ever more grandiose actions have arguably been the greatest change (even if it is missed by most outside the financial world) affecting how the global economy has metamorphosed since 2008. In our eyes, the extraordinarily loose monetary policies, including historically low interest rates and industrial-scale money printing, have contributed towards a pandemic of wealth inequality, with the richer benefitting from rising asset prices and the poor suffering from rising consumer prices. This has been a major contributor to the unexpected political outcomes of the last decade and will be a factor behind political instability in the coming years.
Central bankers have also created an “everything bubble”, with the prices of many financial instruments and nearly all assets rising to unusually high levels. In the financial markets we invest in, we have seen regular records set in the valuations and prices of government bonds, corporate bonds, global equity indices and many corporate shares over the last few years, reflective of the desperation of all investors to move money away from cash accounts and into anything that provides a potential return. This is also why we have seen the price of collectables, artwork, vintage cars and fashionable cryptocurrencies boom, as all of the money created and pumped into the economy by central bankers seeks a home. There is certainly the chance that if, and it remains a big if, central bankers are ever forced to raise interest rates because of growing inflationary pulses and/or because of higher levels of economic growth, then the unanchored valuations of many assets could fall very far. The good news for investors is that alongside the à la mode expensive investments there remain a cohort of cheaper, less trendy opportunities where we continue to focus our attention.
The same again?
Interestingly, over the last few months financial markets have implied that rather than worrying about interest rate rises brought about by inflation and excessive economic growth, we should be dusting off the history books from the last decade and expecting another period of low growth, low inflation and low interest rates. In the short term, economic growth was always going to slow from the rampant growth of the initially reopening economy, and what we are currently seeing in growth trends was to be expected. Certainly, the untimely emergence of the “delta variant” has delayed elements of economic growth, whilst denting consumer and corporate confidence. However, we are still of the view that a combination of pent-up demand, government support and record-low interest rates will encourage economic activity as we head in to 2022. This should mean that certain areas of global financial markets that benefit most from economic growth can offer recovery returns through the next year, benefitting our investment strategies.
