Newton’s Clay: QE policy distortions could come back to haunt markets

While some argue the global financial crisis is behind us, manager of the Newton Global Income fund, Nick Clay, believes the extraordinary measures taken by central banks since 2008 have yet to play out.

A constant drip feed of accommodative policies, particularly with rolling quantitative easing (QE) has been framed with comforting words, including talk of ‘escape velocity’, ‘normalisation’ and ‘lift-off’’. Newton believes the world is a lot more fragile than that suggested in the narrative promoted by the authorities.
Forecasting is a fool’s folly as the example of Alex Lewyt, president of the Lewyt vacuum cleaner company shows. In 1955, he predicted nuclear-powered vacuum cleaners within a decade. In contrast, weather forecasters, who are only right half of the time, are better than, say, economists.

It is important to understand we are very much in the midst of an economic experiment. The authorities will concede as much. Even former US Federal Reserve (Fed) chairman Ben Bernanke when formulating policies, admitted, along with other central bankers, he “was learning by doing”. Effectively it was an admission that policy was made up on the hoof.

The outcome of such policies was intended to be quite linear and one that could be forecast with a measure of certainty, with the experiment meant to work in the following way. Large-scale asset purchase programmes or QE, would drive up asset prices, such as those of equity and bonds markets, and the resultant feel-good factor would engage animal spirits in the underlying economy. In turn, increased confidence would spur spending and investment at companies, enabling the economy to start growing again, back to a robust, sustainable level.

What we have now is actually reality in reverse, traditionally, the cog in this machine that should be driving asset growth is the economy, with the productivity of companies encouraging asset markets to respond by reflecting confidence and profitability. Now it is the other way round – the asset markets tell the economy what to do. Whether inflation makes an appearance is the only thing to look out for, so the narrative runs.

The concern is that those responsible for the narrative are the very same people who got the forecasts wrong the first time round – namely, the central bankers. A previous Fed chairman Alan Greenspan discounted the possibility of a nationwide housing bubble in 2005 (a perception built on in business terms by Lehman Brothers) and Bernanke ruled out a recession in 2008. Among politicians, Gordon Brown, former UK prime minister, heralded the defeat of boom and bust.

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