‘Real knowledge is to know the extent of one’s ignorance’ – Confucius
By my reckoning there were utterances or actions from three central banks around the world over the last week which are worth spending two minutes of your time thinking about – if you worry whether your pension fund is going to go up or down in value this year.
Let’s start with our own Bank of England who stood up yesterday and raised their inflation and economic growth forecasts…not even six months after predicting that the aftermath of the Brexit referendum vote would be dire news for UK Economy Inc. unless they cut interest rates and restarted stimulus efforts (which they duly did).
Now the very charitable would say that the Bank’s efforts ‘saved’ the UK economy by suggesting that the Bank was holding the hand of every mortgage payer or business borrower in the land…however I saw precious little evidence of lower interest rates being aggressively passed on (especially as bond yields have spent most of the intervening period going up which will ultimately spill over into borrowing rates you wait).
No, the UK economy has not been dire because the world has not stopped. The dump in the Pound has certainly helped out a few exporters and induced a few more tourists to visit but the reality is that the average consumer out there has kept on spending.
Did you see the updates in the last few days from those venerable retail estate names Carpetright and SCS? More than a few people out there are putting down new floor coverings and relaxing on a recently bought chaise lounge.
So if everything is pukka then surely the Old Lady of Threadneedle Street is primed to raise rates? Well judging by yesterday’s update absolutely not…and basically this is because they don’t really know what is coming next.
A bit of inflation? Probably…but like the little bear’s porridge it will probably be neither hot nor sugary enough to worry about. Some undefined Brexit impact on economic growth? Quite possibly…but it is impossible to quantify at this stage. How about a Trump-led protectionist rout? Do you really think they are going to publicly opine on this!
Here’s the reality. The Bank of England are going to adopt a policy known in Central Bank insider vernacular as ‘playing fast and loose’. Policy – particularly if you factor in the current level of the Pound – is way too loose…but better to be too loose than too tight. Whoever got sacked in the decision-maker world for a bit more inflation and growth than expected? It is the logical reaction to today’s backdrop.
And playing ‘fast and loose’ is catching. The Japanese feel compelled to buy ‘unlimited’ amounts of their own government bonds to stop the yield on their 10 year instruments to rise about a gargantuan 0.2% (!)
Meanwhile in America the Federal Reserve did not change their policy statement wording to any great degree a tacit sign that they are watching the new President’s policies – and the potential disruptions of them – closely.
The dollar’s slide though this week is long overdue and tells you everything that the start of year position for many investors that the US was the cleanest shirt in a generally dirty pile of laundry was overdone. US rates – just like last year – are going up a lot less than people think in 2017.
Now that sort of backdrop is good for inflation, growth and equities. On the latter corporate reporting season has been in full voice over the last week and with mega caps like Royal Dutch, Scottish & Southern and Vodafone reiterating their 4%+ dividend yield commitments for investors at the margin the choice for investors between equities, bonds, gold and cash remains decidedly simple: hold more equities than bonds, have a bit of gold and some dry powder cash to put into the markets when you-know-who tweets something particularly provocative.
Time to raise a glass to those fast and loose central bankers!
Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.
In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis. In December 2016 his Twitter account (@financial_orbit) was named as one of the ’50 accounts investors should follow in 2017’.
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