Quantitative teasing

We are at an interesting point in markets at the moment.  Many equity and bond indices are at all-time highs with the latter driving the former as central bankers continue to pump liquidity into the system in the pursuit of economic growth. What is so mystifying is the belief that yet lower interest rates, allied with more money creation, is going to make any difference.

The latest growth figures from Japan were announced on Monday and they revealed a very anaemic situation.  This is mirrored worldwide for those countries that have implemented QE.  Even the US, whilst arguably the strongest developed economy, is deemed to be lacklustre.

Normal strategic thought would suggest that having spent the eight years since the global financial crisis implementing a certain policy mix, which has failed to make any sustained difference in growth, perhaps there should be a radical rethink.  Clearly Plan A has not worked and perhaps we collectively need to consult the economic theorists and try something else. There is talk of ‘helicopter money’ but that would be a one-off spending bonanza which would put us exactly back where we started when it stops with possibly some unwelcome inflation to boot.

The problem lies with the elected politicians who are effectively delegating the responsibility of getting the economy going to unelected central bankers who only have interest rates and QE at their disposal. But, if banks are not lending and more importantly, individuals and businesses are not borrowing (despite money being at its cheapest rate ever) then it is clearly not the cost that is the issue. Businesses are not investing which is dragging down productivity and unfortunately Brexit hasn’t helped with confidence, a key requirement for long term investment.

Businesses need incentives to invest in the form of fiscal stimulus. This investment should not be in the property market but should instead be in the production and manufacturing sectors.  Similarly, government infrastructure spending should be increased dramatically, financed at rock bottom cost. One can only hope that our Brexit negotiations may galvanise some incentivised investment as the government seeks to spur economic growth.  Perhaps the new incumbents in Numbers 10 and 11 Downing Street will come up with some new thinking now that austerity is no longer the overriding priority.

Sky high equity and bond markets do not correlate with anaemic growth unless you have a collectively huge distortion in the markets.  Even QE is proving more difficult to implement with last week’s buying incomplete. This pushed yields even lower as the Bank of England is expected to have to pay seemingly ever higher prices to attract sellers to fulfil their monthly purchase quota.

We are not sure where this will end but the markets are in charge for now but without support from certain key fundamentals.  A degree of caution would be wise.

Guy Stephens , managing director at Rowan Dartington Signature

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