Every so often we are reminded that the duty of central banks is to “take away the punch bowl once the party gets started”. But today, despite seven years of pouring copious amounts of alcohol into the bowl, the party is still struggling to start.
Now central banks in the UK, Europe and Japan are poised to add another splash of high-octane fire water.
This ever more potent punchbowl is the key reason why asset prices have continued to rise while the real economy has failed to respond in the manner predicted.
It would confound William McChesney Martin, chairman of the Board of Governors of the Federal Reserve, who first employed the vivid punch bowl metaphor back in 1955. He declared that the Fed was “in the position of the chaperone who ordered the punch bowl removed just when the party was really warming up… If we fail to apply the brakes sufficiently, and in time, we shall go over the cliff.”
In the US, interest rates today remain at historic lows and the punch bowl is still centre stage despite repeated warnings that it would be withdrawn. Last week share prices on Wall Street hit a record high, despite disappointing results from giants such as Intel and Starbucks.
In the UK, the Bank of England looks set to cut interest rates from a historic low of 0.5 per cent to 0.25 per cent. Further easing is expected by the European Central Bank in Frankfurt. In Japan, where interest rates are already negative, policymakers are due to step up quantitative easing to trigger sustained growth that has eluded the economy for more than 20 years.
Thus we have moved from punch bowl removal – the single most oft-cited criticism of the Alan Greenspan era at the US Federal Reserve – to “helicopter money”, the phrase that came to characterise the period of his successor Ben Bernanke, as he wrestled with the epic banking crisis.
Britain’s latest incursion into monetary easing – set to be followed by a “reset” (aka loosening) of the government’s fiscal policy in the Autumn Statement – has been triggered by fears of an economic slowdown and risk of recession.
For the moment, investors are enjoying the ride – and there is no lack of money looking for investment. Institutions are awash with cash, and will soon be in receipt of the £24 billion proceeds of the sale of tech super stock Arm Holdings.
Last week the FTSE100 Index edged up another 0.9 per cent to close at 6,730.48, a ten-month high, and has now risen 21 per cent from its low in February. The FTSE250 Index also ended higher last week, at 16,983.46. While still below its pre-Brexit vote high, it has rallied 13 per cent from its immediate ‘Brexit shock’ low.
At the same time, bond prices have continued to maintain historic highs with investors keen to lock in already derisory yield returns ahead of a further cut in interest rates. It is, by any measure, an extraordinary state of affairs.
Seasoned pundits continue to warn of a deadly reckoning – a sudden ignition of inflation, a bursting of the asset price bubbles – and an epic scramble for the exits. But the veterans have been about this for several years, only for their dark premonitions to be confounded by yet further rises in the punchbowl alcohol content and low level flights overhead of the magic money helicopter.
It may well all end badly, both for financial markets and the real economy. But for the moment it is hard to fly in the face of this continuing desperate monetary stimulus.
Investment trusts hit record high
This helps to explain an otherwise unlikely out-turn in the investment trust world.
The sector’s total assets under management (AUM) reached a new record high of £141billion at the end of June, having almost doubled in a decade, according to data released last week by the Association of Investment Companies.
This adds almost £5bn to the AUM at the previous month end, and almost £9bn since the end of January. It compares to £76bn of AUM a decade ago, at end-June 2006.
The global sector is the largest investment company sector with total assets of £22bn. The second-largest sector is property, (£13bn, compared to £6bn a decade ago). Private equity is the third-largest by total assets (£13bn). The UK Equity Income sector is today the fourth-largest sector, with total assets of £10bn, down from third place a decade ago, when assets here totalled £8bn. The biggest change is the infrastructure sector, fifth-largest with total assets of £8bn, up from a slim £246m a decade ago.