Markets

September 15th 2018 will mark the 10 year anniversary of the event that history will record as triggering the financial crisis that was followed by global reactions that would have been seen as impossible in earlier times.  Most developed economies moved their central bank rates to be net negative (in real terms) and central banks became the largest buyers of fixed income securities that have ever been seen, adding trillions to their balance sheets and effectively the same amount of new liquidity to the money markets.  Money printing is not really the best shorthand, but that is what the average person easily understands as being the process.

It is perhaps disappointing to politicians and especially the top central bankers that they are not thanked much for acting to prevent a recession like that of the 1930s.    However, the consequences of these actions have not yet fully worked their way through.  Some have been good for many people – asset prices have risen as would be expected when there is loads more cash sloshing around.  But because austerity was an accompanying part of the economic package in many major economies, there have been negative consequences for those who have no assets, or whose main asset is their human capital – their ability to sell their labour.  Wages have not risen much because of contemporary changes in technology, society and the relative power of the socialist vs capitalist elements in politics.

It is in fact a rather unfortunate irony of the post financial crisis world that the solutions adopted to sort out the mess directly caused by irresponsible financial engineering – the invention of extra fictitious assets for those who already had plenty of assets – is in fact an application of more short term financial engineering.   This is like giving the drunk guy another bottle of vodka because you feel sorry for him.

It is also much the same as the high interest rate lender offering a consolidation loan to the person who has got in a mess and can’t pay their credit card and bank loan instalments, knowing that they will struggle with the monthly cost but that there are valuable assets to be had if they default.  The world remains relatively Dickensian.

The respected fund manger Edward Bonham-Carter (c0-founder and formerly managing director at Jupiter) recently made the point (in a piece about this 10 year anniversary) that global indebtedness is now at astronomic levels.  In some emerging markets the stress of such debt is being thrown into sharper focus by the rising value of the dollar and less than stable politics (Argentina and Turkey).  But debt in much larger economies is gigantic in comparison.

Most of the warning signs that preceded the last stock market collapse are now flashing, some quite urgently.   As always the market won’t correct itself by slowing down gently and having a long pause, even if a proportion of participants know when to start taking defensive measures.  It occurred to me once that maturity is knowing which drink is the last one you can have before you lose control and get ridiculously drunk with all the negative consequences.  Most global stock markets have had that last ‘sensible’ drink.  Some more drinking will no doubt raise a further temporary feeling of joy without consequences, but the hangover will be nasty.