Feeling nervous? You should be. That’s the basic takeaway from the panel conversation I have been hosting at the Edinburgh Festival Fringe recently at Panmure House, Adam Smith’s last home in Edinburgh.
I couldn’t get much consensus out of my many clever guests about how the world can be fixed. No one knows with any certainty how to normalise monetary policy, banish crony capitalism, restore local democracy, rebalance the UK economy, break up global oligopolies or sensibly slash productivity destroying regulation. But there have been some outbreaks of full-on agreement.
For example, there is yet to be a person on the stage who hasn’t expressed some degree of terror about having to invest in the middle of the greatest financial experiment of all time. And with good reason. We are figuring out what to do with our money in a world of extremes – and as James Ferguson of the Macro Strategy Partnership points out, life is fragile at the extremes.
Thanks to low interest rates making it feel irrelevant how long it might be before exciting companies actually produce returns (see WeWork), value stocks are trading even lower relative to growth stocks than they were in 2000 – a 44-year low in fact. The pound is trading at a 35-year low relative to the dollar. US stock prices are at a 50-year high relative to US GDP. The last time the ratio hit these levels, the Dow Jones fell by more than 73% in real terms before it hit its low in 1982. Nasty.
The strange world of bonds
Then there are bonds – the epicentre of modern monetary weirdness. Bond investors appear to be super bullish. The bears have given up and today almost no one expects inflation – seemingly ever again. Yields are negative in nominal terms across Europe (you pay governments to borrow money from you). There is increasing talk of the introduction of negative interest rates across the board on ordinary deposit accounts.
And it has become perfectly commonplace to suggest that if interest rates can’t be made quite negative enough to stimulate economies without creating runs on banks and various other nasty side effects (why pay to keep your money in the bank when you can lock it up under your bed?) the fiscal and monetary authorities should get together to print loadsa money and hand it over to anyone likely to have a go at spending it.
BlackRock (an absolute font of feeble-minded ideas these days) calls this a “monetary financed fiscal facility”. It is to come with a “mechanism that enables the nimble deployment of productive fiscal policy”. You might think there is an oxymoron in there, but the plan is for the productive fiscal policy to work to force “medium-term trend inflation” up to the right sort of levels. That done, the “facility” will be closed with central bank independence and credibility neatly preserved along the way. Magic.
No one on my panels has fallen for this. We use a lot of quotes on the show, and every time I bring up the idea of time-limited People’s QE (for this is basically what it is) somebody quotes Milton Friedman’s brilliant insight – that “nothing is so permanent as a temporary government programme”. But the mutterings about ignoring many thousands of years of evidence that money printing mostly goes wrong isn’t the only reason to imagine inflation as more resting than dying.
A US-China Cold War is under way
Alexander Chartres of Ruffer, a money manager, noted that a new Cold War between the US and China is clearly under way – the tough trade talk, the sharp rises in defence spending and the cyber and proxy wars being fought partly by corporations are all signals of this. If you accept, he says, that one of the main drivers behind the benign conditions of the past 30 years (falling costs, falling inflation, low interest rates) has been the rise of the Chinese economy and the enmeshment of the Chinese and US economies, you also have to accept that the divorce of those economies will probably have the opposite effect and that the complications of it will affect “everything in your portfolio”.
Note that the likes of Apple are already looking at moving their supply chain out of China. Investing is now more about geopolitics than it has been for a long time. If power, pride and security start to matter more to governments than economics, everything clearly begins to change (not necessarily for the better). So I asked my panellists, what do long-term investors do?
Hold gold and hope for the best
Almost every panellist so far has said hold gold. Some have also said silver. The gold price is at a 30-year high relative to silver (more extremes!) so if you are bullish on gold, you rather have to be fairly bullish on silver too.
Sterling – and sterling assets – have often been mentioned, given the pound’s fall from its 30-year range of $1.40-$2.00. Any further falls ahead of Brexit should, says Ferguson, be “considered a superb buying opportunity”.
He also likes oil. This is about as unfashionable an opinion as believing in inflation or sterling at the moment (note that only 1% of fund managers currently expect inflation to rise from here). But oil production is at “extreme lows”. It is not just equity value investors and bond bears who have thrown in the towel this year. Oil producers have, too. Opec has cut back production and global production has fallen to the levels of about four years ago – discounting a total stall in global trade growth.
If the trade war under way at the moment prompts a full-on global recession that might make a little sense. If it doesn’t, he says, the “risks to the oil price on the upside now very much outweigh those to the downside”.
I know that none of this sounds exciting or particularly optimistic – my guess is that by the end of their hour at Panmure House, some of our audience members slightly wished they’d gone to see a nice acrobatics show instead.
But the key message from this run of Adam Smith-style talking has been an important one: the next three decades are going to be different to the last three – and that’s going to make investing very complicated indeed.
• This article was first published in the Financial Times