14th September 2016

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Global Central Banks now own $24 trillion in public securities and have driven another $14 trillion’s worth into negative yields. $40 trillion in un-investable securities. Incredible. Yet still, after over 260 rate cuts and all of the $trillions of QE, developed market countries still face major economic issues. Whether it be deflationary price movements, anaemic growth levels, stagnant wages, unbalanced labour markets or rising levels of inequality, it has become more evident than ever that governments and central banks have failed to address many of the issues brought into focus by the 2008 crisis.

Central Bankers – Bereft of Ideas

The recent Jackson Hole meeting of global central bankers produced little in the way of new thinking. That the participants do not seem to recognise that a change is needed is in many ways astonishing. The much heralded deputy head of the Federal Reserve, Stanley Fisher, was asked about the inconsistency of today’s current monetary policy. In response, he emphasised that trade-offs are inherent in any economic policy, like that of savers versus borrowers. Fair enough. However when highlighting the positives of zero and negative rates, the best example he could muster was that it pushes up equity prices. We have been fed this argument since the days of Alan Greenspan. This trickle down economic policy did not work then and it certainly is not working now. However simple appreciation of the consequences should be straightforward for a Nobel prize economist or even one with a simple PhD from Princeton or MIT. An example for Mr Fisher, for every dollar gained by a pension fund through a drop in interest rates, currently liabilities will rise by more than two dollars. Taken in aggregate, when economies’ need for savings are growing due to demographic issues, many of the benefits of zero/negative rates have already been priced in, at a time when savings rates have not nearly been high enough. What does the future look like today for a saver entering the jobs market?

Distortive Impact of QE

Currently, the capital markets are showing real signs of strain due to the intrusion of vast sums of QE. The BOJ, BOE and ECB are all facing serious liquidity issues due to the scale of their asset purchasing programmes. As a result we are seeing some strange occurrences across various markets – BoE having to pay hefty premiums just to acquire government bonds, corporates in Europe issuing at negative yields directly to the ECB, whilst the asset management industry in Japan is creating new Equity ETF’s to sell directly to the BOJ – already one of the largest owners of Japanese company stocks. Central Banks have distorted the operational capacity of capital markets which can no longer fulfil their core function; the effective allocation of capital and the transparent market pricing of risk. It is a black mark on capitalism and free market economics that ‘Laissez faire’ central banks have created.

Time for Change

As we at Rubrics have stated in earlier pieces this year, we believe we are close to a significant change in policy and direction. The catalyst for this is political. Governments around the world are seeing shifts both to the extreme left and right due to a disillusioned electorate. The current system now only works for the very few. The change we envisage is a move back towards fiscal policy and away from the flawed monetary policies of the last few decades. For the average person these policies should have a more equitable outcome, which would represent a big positive. However, such policies could also have questionable long term benefits. Not least on the basis that elected governments do not represent the most effective alternative for the allocation of capital. In reality however, such a move will be necessary to ensure we do not see a breakdown in political stability in the West. The impact on the capital markets will potentially be significant. As Stanley Fisher and his Central Bank colleagues have recently pointed out, asset prices have been manipulated by monetary policy. Without the political backing of QE/negative rates, and with a firm shift towards more inflationary fiscal policies, asset prices could be in for more turbulent times.

By Steven O’Hanlon