Blame the top central bankers for the financial casino

IGNORE pundits who attempt to predict gyrating markets. Some, such as The Guardian’s economics writer, are claiming that ups and downs could be a signal for another 1929-type Great Crash; others on CNBC and Bloomberg TV are telling readers to buy.

Forecasts are being met with acute scepticism – hardly surprising while markets from Asia to Europe, US and Latin America seesaw. The bottom line is that virtually everyone in banks, broking houses, asset managers, TV channels, newspapers and newsletters have failed to forecast the timing of the global market tumble. Yes, there have been warnings, but most of the “permabears” and other pessimists who have been traipsing around the studios have been sounding the bell of doom for many months, if not several years. During that time stock markets climbed to new heights and, following the slide and bounce, prices are generally back to levels when the Cassandras originally opined that there were dark clouds overhead. The “permabulls” in contrast were looking to the sky and while some are belatedly issuing warnings, others continue to talk their book and are encouraging young and old to buy shares which cannot be valued during times of financial stress.

So what does the average person do? Those fortunate to have financial assets other than homes (which are for living), and state and corporate pensions, have an acute dilemma. They have to make their own judgements or go by the judgments of advisers – which are guesses in the present circumstances. Where is a safe place for their hard-earned savings? Cash earns virtually nothing, and top sovereign and AAA short, medium and long-term bonds are offering punitive yields. Fair value for a 10-year US Treasury bond, taking into account actual inflation – including medical insurance, house prices, etc – should be 4 per cent in the US, for example. Instead, yields are around 2 per cent, and that miserly return implies that on a compounded basis, capital invested would double after 35 years!

Little wonder that surplus investment cash has been pouring into so-called risk assets ranging from low-yielding, overpriced rental properties, shares, commodities, currency speculation, art and other collectible items.
The justification for buying financial assets at levels which were way beyond the most optimistic forecast 10-20 years ago is that money yields almost zero and value can no longer be determined. This is global financial casino behaviour and “selling to the greater fool” talk.

Surprise, surprise, showing that one and one still makes two, instead of three and four; there have been periodic slumps ranging from commodities, equities and property from time to time. Speculative tech and biotech shares that aren’t even profitable surge on momentum because the charts depict up and up until the crowd belatedly sell when the chart dips and the picture turns into a steep fall. Overvalued markets wait for some event (for example, Greece and currently China) and then the talk shop begins with Americans from the Midwest, for example – the new experts on these countries.

Reckless monetary experiment of Bernanke, Yellen, Draghi, Carney and Kuroda

The blame for the financial casino lies squarely with developed-nation central bankers, who should be independent of politicians. Officials of the US Federal Reserve Board, European Central Bank (ECB), Bank of England (BOE) and Bank of Japan (BOJ) – who just met in Jackson Hole, Wyoming – should look into a mirror and chide themselves for the historically untested experiment of unprecedented monetary-ease and zero-interest-rate policies. Former Fed chairman Ben Bernanke’s initial liquidity injection helped ease the 2008 credit crunch, but he and his successor Janet Yellen’s subsequent quantitative easing (QE) programmes in recent years have created a host of global problems, including fickle foreign money pouring into Asian and other emerging market assets and then fleeing again. Depressingly, despite the risks, Fed counterparts at the ECB, BOE, BOJ and People’s Bank of China (PBOC) are playing the same game, and the latest hints of renewed QE caused the most recent rally.

Hopefully, if they inject another dose of the monetary drug, it will work this time – but for how long?
The problem is that this policy has created malinvestment – that is, misallocation of resources such as overbuilding in China and other parts of the world plus larger debt. This downgrades economic productivity and performance, resulting in disappointing growth despite almost seven years of QE. It will be interesting to see, for example, what happens to recent huge residential and other developments in London and other places around the world which are relying on continual investments from China, the rest of Asia, Russians and East Europeans.

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