"I and others, have, for several years now, suggested that the primary problem lies with zero/negative interest rates; that not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models – those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending. They also keep zombie corporations alive and inhibit Schumpeter’s “creative destruction” which many argue is the hallmark of capitalism. Capitalism, almost “commonsensically”, cannot function well at the zero bound or with a minus sign as a yield." Bill Gross – Janus Capital Group

Not always the most consistent of commentators, but there is no denying that his latest epistle carries more than a hint of truth. Markets are broken and trying to divine an investment strategy is more akin to going through the card at Newmarket; the odds at the race course will be a lot fairer than the ones currently on offer in bond world. Savers in search of income are being forced into areas which from a risk perspective they wouldn’t normally touch; high yield bonds, emerging market debt, equities and property all of which stand close to all-time highs and are seriously “expensive”, beset with liquidity issues or provide little or no downside cushion.

Worse still, the pensions industry still clings to heroic assumptions about growth rates in all manner of markets. Underfunding has been an issue for many a year but if realistic growth rates were factored in the shortfall would be catastrophic for insurance companies and pension fund trustees alike. In the US the American Academy of Actuaries and the Society of Actuaries has scrapped its long time joint Pension Task Force and banned the dissemination of its paper highlighting this dilemma, under threat of legal action against would be transgressors. As one pensions expert put it, “an inferno in the making, but without the benefit of Dante’s poetry.”

David Fuller's view

What follows from Clive Hale is a sensible review of global asset classes which subscribers may find refreshing and helpful for the perspective it provides. 

I will address the opening quote with my further thoughts on this report.  It was the mild mannered academic Ben Bernanke who first introduced QE in our era.  For a refresher on this subject, it is worth re-reading the FT’s article: US Federal Reserve: The Bernanke years, published on December 15, 2013. 

Bernanke was appointed to lead the Fed in 2005, because he was an expert on the Great Depression and had promised to never allow another one to occur.  As fate would have it, he was soon challenged in 2008 when US banks could have caused a depression with their ‘liar loans’, leveraged many times by some firms. 

Bernanke’s series of QE programmes over several years were intended to lift the stock market sufficiently to boost confidence, preventing a depression mentality from persisting and cushioning the economy.  Bernanke succeeded in achieving this, although he was widely criticised by many financial commentators for ‘stoking future inflation’, which has yet to appear because of all the deleveraging which followed 2008.

Critics also said that by preventing a much sharper but probably shorter economic collapse, Bernanke had prevented the economy’s self-clearing mechanism from occurring (a euphemism for crash and burn) which in agricultural terms is soon followed by green shoots of recovery.  I disagreed, having heard from my parents about the Great Depression and also having seen how my mother never really got over that experience.  However, we will never really know how a supposedly benign neglect approach would have played out over the years following 2008. 

Today, investors are certainly much better off, although the majority of blue collar workers, not to mention the poorest people in developing countries, have been left behind by the very slow global GDP growth that we have seen.  Central banks and QE policies continue to be blamed.  However, many central bankers, while saying that they will do all that they can, have also commented on the limits of monetary policy alone.  They have repeatedly called for fiscal spending, of which we have seen very little in the developed economies. 

Which countries will change this?  The USA is in a position to do so, although it might not this side of the General Election result.  The UK is certainly talking about fiscal spending, as the new government should as it prepares to leave the EU.  However, I trust that the cripplingly expensive and outdated Hinkley Point nuclear power plant project, beloved by David Cameron and George Osborne, will be cancelled this month, shortly after the G-20 meeting in China. 

(See also: May Will Be Silent on Hinkley During China G-20, Official Says – this makes sense as it would only be a distraction at an important meeting.)

Here is a link to Clive Hale’s report.