Throughout the history of financial markets, various colourful and interesting personalities are known to dominate various time periods, appearing as ‘wizards’ or narrative icons of dominating market trends in those times.
Think about the 1980s for a moment. Both Ronald Reagan and Margaret Thatcher were sworn into office in the United States and in Great Britain and both advocated deregulation and free trade policies, enabling a boom in financial assets in the Western developed markets. The late John Gutfreund and Lewis Ranieri were running Salomon Brothers, and it was the “Greed is Good” era, where the narrative was fed by Michael Milken, Ivan Boesky, Martin Zweig, and the image of the flamboyant and outspoken investment banker in Winchesters and suspenders became synonymous with Wall Street culture – the archetype being Gordon Gekko.
During the days of the late 1990s and the Tech Bubble, the zeigeist and animal spirits of that time were lifted by characters like Henry Blodget, Jack Grumman, Frank Quattrone and Mary Meeker. Back then, the techno-preneurs like Paul Graham, Elon Musk, Peter Thiel and Larry Page were working hard on their projects and startups, and are now successful Venture Capitalists or business owners in their own right.
Then there were the days of the 2000s. The decade between 2000 to 2010 saw 2 huge booms (or bubbles depending on how one views them), one in the US housing market, which led to the collapse in subprime mortgages, and the other, the famous commodity boom. The housing bubble era was fostered by the likes of Louis Cavalier and Abby Joseph Cohen. The emerging markets/commodity boom narrative were led by Jim O’Neil (who coined the term BRICs), Jim Rogers, Marc Faber, T.Boone Pickens, Peter Schiff and Eric Sprott.
Fast forward to the present day, and we get a whole new host of icons in the present cycle. Only this time, they are leading academics and economists, and are running (or advising) various central banks around the world. This new narrative of omnipotence are led by the likes of Paul Krugman, Ben Bernanke, Mark Carney, Haruhiko Kuroda, Janet Yellen and Mario Draghi. These powerful figures have an almost all-encompassing, even-omnipotent presence and influence in the global financial markets as we speak.
We initially started this decade with the belief that central banks could solve the issue of a lethargic and slow economy since the 2008-2009 global financial crisis. And everyone relied on these leading policy-makers.
Perhaps, the current narrative could be the real truth, and these characters could continue to be the trend guardians. However, the frightening truth is what if the narrative does not play out in the way they expect it to be?
Already, we are seeing some signs of central bankers losing their grips over the markets. In Europe and Japan, the imposition of a negative interest rate policy on deposits park at their respective central banks’ facilities have not had the desired effect that policy-makers desire for (perhaps we need more time, but how long more?).
Consider that in both the European continent as well as Japan, both the Euro and the Japanese Yen currencies have been strengthening relative to their trade partners. Additionally, European banks are parking more money at the European Central Bank (ECB) despite them having to pay more on those deposits. In Japan, consumers and households are hoarding cash instead of investing or spending, which is entirely against what the Abe-regime hopes for.
At the same time, the US Federal Reserve seems to be backtracking on its expected path of tightening via hikes in the benchmark Fed Funds rates – perhaps to soften the US dollar and to alleviate concerns of the international community. The credibility of this (in)famous institution is now at stake. The idea of venturing into negative rates territory or even a “perma-QE” era across the developed economies is now not as seemingly far-fetched as it was a couple of years back …
What and how do we make of this?
It is entirely possible that we are at an inflection point in this decade – that central banks may be facing a ‘crisis’ and that more people increasingly do not buy the fact that central bankers are really in control. Politicians and policy-makers will not want people to know this truth, and will do all they can in their power to keep the lie from being discovered.
Even an ex-insider has gave us a warning recently: Dr Daniel Thornton from the St.Louis Fed in the US has this to say with the following chart:
“I predict the current level of household net worth is not sustainable. I believe that some unforseeable event will prick the bubble, perhaps this year. The result will be recession which will, unfortunately, be accompanied by more misguided monetary and fiscal policies. I call this monetary and fiscal policy insanity: Keep doing the same thing and expect a different result! I would love to be wrong, but I doubt I will be.”
Some time in the not-too future, we may look back in history and characterize this decade as the “Central Bank Decade”…
Course of Action / Takeways:
- Prepare for a return of market volatility with a vengeance! (avoid packaged-alpha strategies that generate returns from short volatility exposures)
- Avoid long beta exposures, go for lowly-correlated strategies
- Be nimble in the current market environment (everything is expensive!)
- Owning real assets makes sense when there is a bubble in financial assets
- If you must be long, have various hedges in place and be widely diversified across asset classes and market segments
P.S. There is a book titled ‘Lords of Finance‘ by investor Liaquat Ahamed which won the 2010 Pulitzer Prize – I’m planning to read it soon. Here’s the summary of it:
‘It is commonly believed that the Great Depression that began in 1929 resulted from a confluence of events beyond any one person’s or government’s control. In fact, as Liaquat Ahamed reveals, it was the decisions made by a small number of central bankers that were the primary cause of that economic meltdown, the effects of which set the stage for World War II and reverberated for decades. As yet another period of economic turmoil makes headlines today, Lords of Finance is a potent reminder of the enormous impact that the decisions of central bankers can have, their fallibility, and the terrible human consequences that can result when they are wrong.’