In this edition of IML (Investors Mutual) Market Musings, Hugh Giddy, IML’s Head of Research and Senior Portfolio Manager, reflects on the current state of global growth & indebtedness in the years since the GFC. Musing on the various measures taken by central banks, governments and public companies. He explains some of the headwinds that the world faces that investors should be mindful of when setting their expectations in a low growth, high debt environment.
Here is the start of the report -
"In December the US Federal Reserve finally raised interest rates by a miniscule 25 basis points after six years of effectively zero rates. It has surprised almost everyone, not least of all the Federal Reserve, how sluggish the recovery from 2008’s Global Financial Crisis has been. Over that period economists have continuously forecast growth levels more reminiscent of previous recoveries and steadily had to cut those forecasts as actual events unfolded.
The authorities have tried many different approaches to stimulate growth, including punitively low interest rates for savers (in an attempt to make borrowing even more attractive), and in some European countries both short and long rates are now negative. Japan has just joined the club of central banks charging depositors to store their money in the banking system by lowering rates 1below zero. This can hardly be popular amongst Japan’s large population of retirees who would be hoping to get a positive return on their savings.
Quantitative easing (QE) has been tried repeatedly without leading to any useful real economic benefit – inflation remains low (higher inflation encourages people to spend rather than watch the real value of their savings erode), credit growth is anaemic despite low interest rates and growth has barely budged. Japan continues to experience swings in and out of recession despite aggressive monetary easing and money printing through QE. Indeed one could argue that the flailing efforts of monetary authorities to stimulate economies has actually been harmful in that the only noticeable effect has been a sharp rise in financial asset prices – with strong rises in selected share prices and indices, probable property bubbles, particularly in commodity exporting countries such as Canada and Australia, and very low spreads for high yield debt, i.e. very high risk debt, - until recently. The surge in these financial assets has distorted the pricing mechanism, and bubbles inevitably end in a bust."
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Also - Hugh Giddy, the author of this report appeared recently on Sky Business with Paul Switzer in the "Switzer Report" - he discusses the themes that are outlined in the report. You can watch this video here in addition to reading the report.