Markets have recovered their poise, but investors haven’t

There is still too much talk of central banking, radical monetary policy, and how quickly we can implement it, says John Stepek.

This week, most developed markets either hit record highs, or at least their highs for the year. Looking back, it's hard to believe that 2016 saw one of the nastiest starts on record just two months ago, headlines shrieked that global stocks had entered a "bear" market (having fallen by 20%). But while markets have recovered their poise, investors haven't. All the talk remains of central banking, radical monetary policy, and how quickly we can implement it.

A report from Deutsche Bank last week argued that obstacles to full-blown "helicopter money" where central banks print money to fund government or consumer spending directly are largely political, that money printing "has strong historical precedent" (Japan's early escape from the Great Depression in the 1930s being the main example) and that we should actively harness "the infinite power of central-bank balance sheets". The San Francisco Federal Reserve Bank recently argued that the US central bank under Janet Yellen could achieve healthy US growth more rapidly by allowing "inflation to rise temporarily above" its 2% target rate.

And this isn't just policy wonks debating among themselves it's having a real impact. One reason for the rapid market rebound is that Yellen has U-turned on plans to raise US rates much further this year, despite rising inflation. As James Butterfill of ETF Securities notes, "a negative real rate policy is clearly being pursued in the US", as per the San Francisco Fed's suggestion.

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Meanwhile, negative nominal interest rates mean some lucky Belgians are being paid to take out mortgages. Last week, Oliver Kamm in The Times even argued for a ban on cash, to make it easier for the Bank of England to impose negative rates here. We've been warning of the "war on cash" for a while, but it's quite jarring to see the policy being advocated in a mainstream broadsheet. The sheer clamour for central banks to "do something else" makes us think it's only a matter of time before they do take even more radical steps than we've already seen.

That's why you should ensure you hold some gold in case they mess it up (for a change). But there's another sector one that tends to prosper against an inflationary backdrop you should take a long look at. Bank of America Merrill Lynch (BoAML) noted this week that "the rolling return from commodities" is at its lowest since 1933, and so there should be long-term upside.

However, BoAML warns, "sustained commodity outperformance requires a secular catalyst". Such as? "Today that would need to be an inflation shock", which BoAML reckons is unlikely, due to long-term deflationary forces such as robotics(see our cover story for more).I'm not so sure. Just look at how the oil price shrugged off this weekend's "Doha disappointment". A rebound in commodity prices and inflation is far from priced in by investors one reason to think it might just happen.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.