EDITOR'S LETTERJohn Stepek
Markets have recovered their poise, but investors haven’t
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.
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. 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.