Monetary Cold Shower
Pfäffikon SZ, Switzerland – 2015 is slowly coming to an end and investors are mainly interested in the thinking of the central bankers. After all, it’s still their turn to act and they are seen by many as the matadors of the 21st century. Some claim that their credibility is at stake, others wonder if all the monetary tricks were even worth it. An increasing amount of investors doubt the effectiveness of the stimulans policies, which might become a focal point in 2016.
Makeable
Various macro economists believe that the economy is makeable. Firing up or cooling down economic activity would in that case fall entirely within the purview of the central bankers. Granted that the Fed, the ECB and the PBOC are powerful institutions, the idea they would be able to make or break an economy is a bridge too far. A simple proof is that the ECB has missed their inflation target for many years, and we need not get into the Fed’s. I politely point the reader to the so-called “Wu-Xia Shadow Federal Funds Rate” that has been in negative territories since 2009. When you dive deeper into the American inflation figures you will come to the conclusion that the inflation can be largely attributed to the increases in the housing market. The surplus liquidity simply stays trapped at several institutions which have an extreme focus on deposits.
Enemies
It’s worth mentioning that the central bankers have to grapple with two other enemies, namely the demographic composition of the world and the deflationary technological suction power. It is telling that China recently dropped their one child policy. Moreover, in some cases technological innovation can be seen as creative destruction. Central bankers wish to banish these forces, which comes down to dampening them. A fight against mother nature, however, is perhaps too ambitious, without mentioning the irreversible developments in technology that take place. In my view it’s a lot smarter to let the market do its job here. It seems as if some central bankers were educated by the former politburo.
Mental Constitution
In any case, investors have been worrying about a possible hike in interest rates by the Fed by a meaningless 25 basis points. The likelihood of that hike is currently approximately 70% if we use the prices of futures as a measure. For now the monetary policy makers continue to disillusion investors and citizens as, after years of tinkering, the objectives have not been reached. The result is that investors can expect more volatility and that’s exactly what the central bankers were aiming to avoid. For an investor that has done his homework and who possesses a strong mental constitution this will likely usher in golden times.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
