Since the banking crisis of 2008, governments and central banks in much of the developed world have in effect been providing a temporary roof for the economy, the financial markets and the banking sector.
They have followed a twin policy of keeping interest rates at virtually zero while being huge buyers of government bonds. This twin policy had twin objectives: giving time for banks to recover and clean up their balance sheets without either going under themselves or forcing their borrowers to go bust; and, by driving private investors and institutions out of “safe” investments like cash deposits and government bonds into riskier assets like corporate bonds and shares, reducing the cost of capital for businesses and stimulating investment and growth.
This policy has worked better in some areas than in others. The awful prospect of a 1930s- type depression and widespread bank failures has been avoided, while investors in both shares and bonds have enjoyed bull market returns.
However, this has taken place against a decidedly unbullish economic background; the recovery to pre-crisis rates of growth in the developed world is still a long way off. There is even a view that pre-2007 rates of growth were artificially inflated by excessive borrowing and other brilliant wheezes from the financial sector, and that future growth, though still positive, will be decidedly less sparkling.
One day, like the scaffolding and sheeting cover, this policy is going to have to be carefully dismantled and the rebuilt roof will have to take its chances. The policy was never intended to be permanent, because there are real and obvious inflationary dangers when a central bank in effect prints money to lend to the government to spend. But where several different countries and regions are concerned, each facing a different set of economic circumstances, and with a varying balance of political forces and expert opinion, the chances of a brilliantly coordinated move which gets the timing spot on are close to zero.
One of the more alarming signs of the upside down logic which this artificial environment encourages is that investment markets can actually go down if the economic news gets better, and up if it gets worse.
The reason for this is that any improvement could bring forward the moment at which the Fed (or the ECB, or the Bank of England) will start to reduce the huge volume of liquidity which has been coursing through the markets like an illegal stimulant. Markets which are driven by the herd emotions of greed and panic are prone to overshoot in both directions; we saw this four years ago at the bottom, and we may have seen it a couple of weeks ago when bourses around the world reached peak levels from which they subsequently fell back.
As one of nature’s Eeyores I am instinctively averse to the Tiggerish enthusiasm of City trading desks, which get ever more excited as share prices rise and rise. When markets go up because they’re going up, I get rather fretful and start looking more and more anxiously for things that could go wrong. The recent dip in markets may have been as irrational as the spike which preceded it, but it does at least feel like a rather calmer environment in which to take investment decisions.
As ever, I don’t claim any insight into where the market is going in the short term. But the most important stuff is happening not so much at roof level (temporary or permanent) but within the house, where thousands of companies are selling stuff every day to billions of people.
Finding the best of these businesses and sticking with them over a long period is what will make you richer; jumping from one trendy new idea to the next will probably make you poorer. As this is, sadly, the last time I will be talking to you in these pages, I want to leave you with one thought, expressed by a much better investor than me: “the stock market is a way of transferring money from the active to the patient”.
I’m off to look for some particularly hyperactive investors so that I can transfer their money into the pockets of my patient clients.
• Gareth Howlett is fund manager director at Brooks Macdonald Asset Management.