Alice’s lessons in economics

To understand how central banks have manipulated markets, just pick up a copy of "Through the Looking Glass", says Merryn Somerset Webb.

It's the time of year to offer Christmas reading lists. But if you haven't the energy to read much more on finance or politics, just grab an old copy of Through the Looking Glass by Lewis Caroll.

As Chris Andrew of wealth manager Clarmond points out, parts of the sequel to Alice in Wonderland tell you all you need know about today's economies. The Red Queen amazes Alice with her ability to run very fast without ever getting anywhere.

In our country, says Alice, "you generally get to somewhere else if you run very fast for a long time as we've been doing". The Red Queen is bemused. "A slow sort of country," she says. "Now here you see it takes all the running you can do to keep in the same place."

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It's a perfect metaphor for the global economy and asset prices. To keep things the same (ie, hang on to a little regular economic growth), central bankers and politicians believe we need increasingly loose monetary policy. Does it make economies grow? We have our doubts. But we don't really know. What we do know is that it makes stock markets grow.

You'll hear analysts and economists say lots about markets and economies over the next month or so, but most of it will be irrelevant. Profit margins don't matter, nor valuations. What matters is what our central bankers, today's Red Queens, are up to.

Who's printing money, how much, and where. The more they print, the more markets rise. If you're in any doubt, check a chart of quantitative easing (QE) volumes against the S&P 500: the two move in lockstep.

So what of 2014? Who'll print and who won't? Most people expect the US to cut back. We're far from convinced it will go far in this direction, but given that the US is expensive anyway, we're happy to stick with buying in countries where ongoing QE is a dead cert.

We've been suggesting you buy Japan and Europe for a while now. That's worked well and we're sticking with it. We are also getting keener on some emerging markets Russia and China in particular. I can't make David C Stevenson a Japan bull, but he seems to be coming round to my views on Russia.

For more ideas, readone of the most interesting roundtables we've had for some time. We will return to all the subjects mentioned in the New Year expect us to start telling you to get back into commodities, energy, China and maybe even a little property.

There will come a point when the monetary policy-driven party ends. Just as Alice eventually decided that her Red Queen was "the cause of all mischief", our politicians may realise that being beholden to what James Ferguson calls the "nutty ideas" of our own for any semblance of growth is no way to run an economy. But that won't happen in 2014.

We are now taking a week off. You'll get your next MoneyWeek on 4 January (Saturday for once, not the usual Friday). A very Happy Christmas to you all.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.