Investors fear unknown as central banks lack firepower
Since the global financial crisis, there have been over 600 interest rate cuts around the world and, according to one investment bank, more than $US12 trillion of bond purchases. Yet economic growth has not been stimulated enough to see anything resembling an economic recovery. What does it all mean?
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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
A.Somner
:
Roger your article contains some points that require further consideration. The main view of the financial community is that rising interest rates will prevent people from borrowing and is a negative for the economy. There are always two sides to every coin. Rising interest rates are a positive for the whole fixed interest section of the financial markets. Not everyone is in debt. Many rely on interest rates for fixed income. The negative impact of rising interest rates is assumed and not proven. A simple correlation with any economic boom will show that interest rates rise with the economy. What were interest rates doing before the GFC? Rising! When a central bank lowers the overnight cash rate or engages in QE to drive down rates in the bond market, it tells the whole world that it thinks things are bad. Not a good message.
You may disagree with this but there is only one market that is in a bubble and that is the bond market. When was the last time anyone saw negative interest rates on a scale like this. Never. Bond prices are so high it is insane. The main event of the great depression was the 1931 soveriegn debt crisis where the bond market collapsed. That means we are not caparitively in the late 1930’s. We are at 1930. The bond market is still intact. The real crisis is ahead of us, not behind.
This is why the likes of Steve Keen who obsess over private debt levels are missing the whole bubble right in front of them. It is not private debt that is the problem. It is public debt. Government. They are the sector that cannot handle higher interest rates. They are having trouble meeting their obligations and interest rates for them are negative! They have to borrow every year perpetually not to invest but just to survive.
This dynamic is the primary reason why the global economy is so sluggish. The bulk of the worlds capital is not investing, it is parking in the bond market. Waiting for the clouds to clear.
The OECD has also conducted a study showing that when governments consume more than approx 37% of the economy through taxation it begins to have a negative impact on growth. Some Euro zone countries are at 45% +. With zero growth. This study suggests that taxations effect on the economy is a bell curve. Up to 37% the economy can grow. Any higher and it starts to decline. Where is Australia. 37%.
The governments keep raising taxes to pay the interest on their debt. Handing it to the biggest owners of their bonds. The central and commercial banks. The money ends up on the central banks balance sheet or the commercial bank who buys more bonds to raise their tier 1 capital reserves or buy back shares. Taxation is being raised to pay the bankers. Governments are strip mining the wealth of the nation to satisfy the bond market. At the moment all roads lead to the bond market which is in a bubble.
My main point here is that if financial educators like yourself can start to see that it is not the private sector debt that is the problem but the public sector, then perhaps this will raise awareness of where the next crisis is coming from and who the problem is.
Roger Montgomery
:
Don’t worry, we have regularly written about personal, corporate and country debt! In fact we just had a discussion about this in our investment committee meeting this afternoon. The challenge is identifying a catalyst or ‘the pin’ that pops the bubble. If you can go back to the 1990’s you might find an article I wrote about Australia’s successive governments ‘drip feeding’ the economy with what is left after taxation. Fully aware of that one too. There are businesses within this picture that are growing and growing strongly. Don’t lose sight of those.
Luke Joseph
:
Great article Roger. Does the reference in the article to the year 2019 have any significance? Are you expecting something to happen to potentially change the course of the global economy around that time?
Roger Montgomery
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Very significant corporate debt levels maturing. Historical records etc.