The calm before the storm?

August 13, 2019

Miles Ashworth, Head of Private Wealth at Creechurch Capital, the Douglas-based boutique discretionary fund management firm, gives his expert commentary.


For market observers fascinated with every twist and turn in the Brexit negotiations, the last few weeks have been eerily quiet. Hopefully this isn’t the pre-cursor to a Brexit Halloween horror show.


This quietness is normal, of course, for this time of year, as politicians depart for their summer holidays. For many, these seasonally quiet months have justified the old mantra to “sell in May”, but with corporate calendars loaded from September onwards things are certain to get more interesting.


In the meantime, stock markets continue in complacent malaise at levels approaching all-time highs, despite clear evidence of a global economic slowdown and escalating Sino-US frictions.


Clearly the central bank put is alive and well – ‘Don’t fight the US Fed’ (if you want to remain solvent) as the old saying goes. When bad news becomes good news, market participants become overly reliant on the greater fool theory or maybe we should all be buying sovereign bonds on negative real and (more worryingly) nominal yields…. personally, we are very comfortable ‘missing out’ on that type of investment opportunity.


When you incorporate second, third, fourth … nth level thinking, or the famous John Maynard Keynes ‘beauty contest’ concept (buying what everyone else considers attractive) you can quickly become entrenched in a world of your own abstract thinking or paralysed by investment indecision.


Back to central banks, a lot of column inches have been devoted to the first US interest rate cut since the global financial crisis. This has undoubtedly been good news in the short-term (as bad news equals good news), but there should be concerns around where this leaves global monetary policy/experimentation in the medium and long-term. The weak justification for the rate cut by US Fed Chairman Powell will lead some to question the independence and/or competence of the world’s pre-eminent central bank, with Wall Street (rising equity markets) and Donald Trump (cheap debt to expand his sprawling property empire) amongst the main benefactors.
More recently we have seen the Reserve Bank of New Zealand surprise the market with a 50bp interest rate cut and Governor Adrian Orr even discussed the possibility of negative interest rates. At this stage we wouldn’t be surprised to see other central banks follow suit


Allen –

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