Roll forward 20 years via a Global Financial Crisis, which came close to destroying the global financial system, and we find that interest rates have been around zero or even below for most of the past 10 years, global FX reserves now total $11.6 Trln, and central bank QE sums to around $14.0 Trln. Only the US and Canada among the G7 economies have managed to escape the zero bound on rates, and then only very modestly, which all begs a counterfactual question. There is no doubt that without the ZIRP and NIRP and unconventional central bank stimulus, the situation would have been a lot worse. But this sets such a low bar in terms of satisfactory outcomes, and the counter should be that, surely the situation of the global economy should now be so much better; and if not , why not?

It can certainly be argued that the costs of this strategy have been high: chronic asset price inflation, which has only served to exacerbate inequality; a very sharp rise in corporate financial engineering, above all a colossal debt for equity swap, and accompanying weakness in business investment, which in turn has contributed to weak growth, that has also added to growing inequality, above all in aspirational terms. But perhaps the worst aspect has been that it has allowed politicians to take a back seat, and more worryingly to use central banks as a scape goat for whatever ails a given economy, above all in an era of rising populism. The latter aspect is all the more worrying at the current juncture where the rising tide of populism drowns out most forms of debate and discussion.

So this leaves a number of questions to consider, for which I have no specific answers, but still require consideration. The first one echoes the old adage: that the definition of insanity is doing the same thing over and over and expecting a different result. Einstein’s version of this was slightly better: We cannot solve our problems with the same thinking we used when we created them. The points in this case being:

a) What are a renewed round of rate cuts and more QE (in whatever form) meant to achieve that the previous concerted efforts clearly did not achieve?

b) Above all in the case of the Eurozone and EU, how does more policy easing from the ECB address any of the following – a a lack of common purpose among governments to reform the Eurozone, above all to implement a banking union, which would facilitate cross border banking and deal with the issue of having far too many banks? How does it change Germany’s intransigent resistance to running a budget deficit, even in the face of the most acute crisis in its manufacturing and export sectors since reunification? The simple message is that all easier monetary policy really achieves, is to provide a benign environment for politicians to deploy fiscal policy and structural and other reforms to kick start economies.

c) Financial repression above all, works by dampening volatility in asset prices, as has been witnessed over the past decade, allowing reach for yield, risk and carry. But in the context of trade wars and tensions, financial markets’ understandable hypersensitivity to every headline or tweet, that dampening effect on volatility will be heavily undermined, and may well heighten the risk of asset price dislocations, which even long- term funds struggle to ride out.

These are difficult questions to ponder, but ignoring, or even worse dismissing them will foster an environment, which does lead to a sharp paradigm shift for investors.

Marc Ostwald E: T: +44(0) 20 7716 8534

5 | ADMISI - The Ghost In The Machine | July/August 2019

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