As anyone who even remotely tracks financial markets will tell you, you really cannot complain they have become boring.
True, until the early 1970s, most people – except day traders – basically viewed markets as something of a curiosity.
Particularly in Europe, the financial industry had very little traction compared to the real economy, and the conservatism of central bankers was matched only by the grim discipline of institutional investors. What seemed unthinkable just a few years earlier has now become commonplace
The international financial order that emerged from the Bretton Woods Conference, whose 75th anniversary is being celebrated this summer, created exceptional stability for “free-world” economies.
What seemed unthinkable just a few years earlier has now become commonplaceBut that stability eventually came to be seen as an unbearable straightjacket. By 1973 the system of fixed exchange rates had fallen apart, the official role of gold was gone and the value of the US dollar began to gyrate.
Enter the great financial market adventure, amplified by massive disinflation and the financial sector’s growing power over the economy in the 1980s and 1990s.
That adventure made it remarkably easy to finance even the wildest technological pipe-dreams – until, that is, the stock market bubble burst in 2000.
Stock market crash
But by then financial markets ruled supreme, so central bankers were forced (without openly admitting as much) to focus on containing the spillover to the real economy from such financial bubbles by cutting interest rates more and more each time – which merely paved the way to the next bubble.
So when the mammoth credit bubble burst in 2008, central banks not only moved to slash rates further, but also intervened with unprecedented creativity.
Financial markets were soon sizzling once again. The 10 years from 2009 to 2019 saw the most fabulous bull market in any living equity investor’s memory.
And concurrently, interest rates continued to fall.
What seemed unthinkable just a few years earlier has now become commonplace.
In fact, absurdity has even become the rule. Investors are now willing to pay the French government to lend it money for 10 years.
Nor is this due to some statistical aberration: there are currently $13tn (£11.6) worth of negative-yielding bonds in the world.
And as banks have so far refrained from charging retail customers for their account balances, the advantage of historically low mortgage lending rates is just about the only change most individuals have noticed.
Businesses are equally delighted with the unprecedentedly cheap funding available to them.
But because they see only weak prospects for economic growth, most of that windfall goes into financial instruments rather than into capital spending. And wouldn’t you know it?
Monetary easing
The topic of one of this summer’s financial market serial drama is the umpteenth next phase of monetary easing by the US Federal Reserve and the European Central Bank.
Some pundits are already demanding that those institutions up the ante – calling, for instance, on the ECB to go beyond sovereign bond purchases and start buying stocks as well.
Others are asking whether Mario Draghi, the ECB’s outgoing president, will “bet the farm” in one last bid to rekindle GDP growth and inflation expectations.
Central bankers, it must be said, are still in the dark about why there is no inflation today, and that mystery will no doubt keep our economist-detectives busy this summer.
How indeed do you explain that the United States is enjoying practically full employment with wages trending upward, while inflation expectations have yet to get off the ground?
Are the deflationary impact of globalisation, the spread of casual, unqualified service jobs in the United States and the “Amazonification” of retail enough to thwart all the efforts made by central banks?
Or could the solution to this enigma be that the all-powerful consumer can now impose low prices that force companies to sacrifice profit margins in order to cover the cost of rising wages?
If so, then downward pressure on margins will only drive businesses’ already low capital spending down further, thereby making anaemic growth a lasting feature of the world economy.
The fear that this may be true is probably what has emboldened the United States to exploit its favourable balance of power with trading partners to grab the largest slice it can of a shrinking global economic pie.
In any event, financial markets have clearly lost their illusions.
The unequivocal flight of investors to growth stocks and bonds reflects their almost unanimous, resigned conclusion that the economy is running on empty, inflation is a thing of the past and rock-bottom interest rates are here to stay.
But that might just be where we are in for a surprise this summer, because as Sherlock Holmes so aptly put it: “There is nothing more deceptive than an obvious fact.” The suspense is on.
Didier Saint-Georges is managing director at Carmignac
