Anthony Peters, SwissInvest strategist
When business volumes are as low as they are, one has plenty of time to contemplate the whichness of the why.
I have never really seen myself as much of a libertarian but following the classic definition of libertarianism proffered by Roderick Long that “any political position that advocates a radical redistribution of power from the coercive state to voluntary associations of free individuals” passes as such, then I guess I must be moving that way.
I somehow have a sinking feeling that the free market we are supposed to be living by and representing is in the process of being legislated out of existence. And why? Probably because it is telling us things that we – not being we as individuals but we, our governments – don’t really want to hear.
Could it be that the more governments intervene in the free movement of goods and services, the less free that movement becomes. Are markets at a standstill simply because the space they live in has become fatally polluted by a collective of small-minded, self-seeking demagogues?
Probably the greatest single driver of what Sir Mervyn King once referred to as the NICE economy (non-inflationary constant expansion) was disinflation imported from China. Not only is that no longer present, we are hugely exposed to importing their inflation and we have no means of combating it.
Going back to early 2008, when still at 7 Investment Management, I wrote a piece which suggested that the credit-fuelled growth economy embedded a network of fatal flaws and that the collapse of the credit markets – this was pre-Lehman – offered up a huge opportunity to right the sinking ship, the rebalance our lifestyles back to spending what we could afford and not what we liked to, as painful as it might be in the short term. I didn’t quite mean that we should go back to knitting our own jumpers and darning socks but a readjustment to living within our means would not be a bad thing.
As we Europeans and Americans know well, living on what we earn and earning what we deserve isn’t a lot of fun. Wealth was built on asset price inflation and not on productivity. In order to prevent a significant and very painful downward adjustment in asset prices, central banks slashed interest rates and so, there we are, six years on, with a large part of the asset price bubble still intact.
Already overpriced
Today sees the introduction of the Help-to-Buy scheme in the United Kingdom under which the government will guarantee 15% of the price of a first-time buyer’s property. Banks are now looking for a 20% deposit on a house against which they will lend 80%. Buyers can put up 5% as the first-loss piece, the government will then offer a guarantee on the next 15% and the banks take the top 80%. In other words we, the taxpayers, own the mezzanine piece of new mortgage loans. Great! So, rather than letting property prices adjust downwards to where they become affordable to “ordinary, hard-working people”, the government helps to lift them up – at everyone’s expense – in order to buy into an overpriced asset class.
I have a sense that the reason markets are so discombobulated is that they instinctively know there is something terribly wrong but that they have not yet found a clear way of articulating what it is. I suppose I would have to plump for suggesting that, seven years after the banking crisis began, the hard decisions have still only been postponed rather than taken.
The realities are that debt is still rising and not falling although the political classes parade around like peacocks behaving as though reduced deficits were surpluses and slowing rates at which indebtedness is rising were debt reduction. Not only that but the private sector indebtedness which was shipped onto the public sector balance sheet during the crisis is now, at best, being returned to the private sector without having been significantly reduced. In the land of smoke and mirrors, there is always a good bid for wet wood and reflective glass.
Probably the greatest single driver of what Sir Mervyn King once referred to as the NICE economy (non-inflationary constant expansion) was disinflation imported from China. Not only is that no longer present, we are hugely exposed to importing their inflation and we have no means of combating it.
As noted above, harsh decisions concerning the asset-price based socio-economic models in the West have been postponed again and again but they cannot be so forever. I believe that to be something markets have finally understood – without knowing it of course – but have not yet found a way of expressing it.
Perhaps they are simply too scared to want to even contemplate what it might be and the best they can do is to close their eyes and behave as though the problems simply weren’t there.
Happy Tuesday, folks.