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Golden Years
By John Newsome on 13th January 2016


Cast your mind back to those halcyon days when storms were nameless. Your dustbins were not only emptied regularly but actually returned to whence they came. Potholing was a weekend leisure activity rather than a description of your drive to work and it was possible to walk the length of the high street without being pestered to set up a direct debit to a charity you'd never heard of.


The world of money has been transformed, too. In the wake of banks forgetting that lending and creditworthiness were not necessarily mutually exclusive, pay day lenders have moved centre stage. At the sovereign level, money printing (or Quantitative Easing (QE), to the more sophisticated), once the preserve of banana republics, is merely another option in central bankers' arsenal of unconventional weaponry.


Last December, markets crashed as Mario Draghi (European Central Bank (ECB) President) unveiled just a little less stimulus than investors wanted. The previous October, Draghi hinted the ECB's current €60bn a month QE habit could be enhanced. "The degree of monetary policy accommodation will need to be re-examined at our December meeting ...... the size, composition and duration of Eurozone QE could be adjusted ...... we're open to a whole menu of monetary policy instruments." Well, it sounded clear enough but after intimating such largesse, his subsequent penny pinching was as popular as Charlie Sheen at a swingers' party. European markets immediately shed 4%.


Now, in theory, the value of any financial asset is the discounted sum of its future cash flows. Yet, the way markets demand ever more extraordinary central bank intervention (and the tantrums they throw when it is not forthcoming) suggests fundamentals are no longer at the top of the agenda.


In days gone by, it was the job of central bankers to take the punch bowl away before the party got out of control. However, the past 20 years witnessed a concerted attempt by policy makers to dampen the volatility of the economic cycle. Such short sighted behaviour, combined with post crisis meddling, now endemic to all major central banks, has only led to increasing volatility in financial markets.


Draghi told us in 2012 that the ECB would do "whatever it takes" to save the Euro. He is now at the helm of a highly experimental attempt to rescue a project that has already failed miserably. Meanwhile, a microscopic rate rise by the U.S. Federal Reserve might be perceived as the prelude to some sort of normalisation but the world economy remains as far from normal as it ever has been. For that reason, we suspect tectonic plates will move faster than the Fed's rate tightening cycle. China is clearly struggling and with emerging nations happy to engage in competitive devaluations, the Fed will be in no hurry to make the mighty dollar any mightier than it already is.


Central banks are being forced to make it up as they go along because the current situation is unique. Eight years after financial meltdown, the can continues to be kicked down the road. The party was great while it lasted but the consequences will continue to be felt for years. A sentiment, I suspect, Charlie knows all too well.


John Newsome can be contacted on:
01423 705123


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