BUSINESS NEWS - The financial markets have their share of gloom merchants who are always predicting financial collapse. Once every decade or so, they turn out to be correct, but listening to them you risk missing out on some spectacular market gains.
But what when sober and pragmatic fund managers such as Donald Amstad from Aberdeen Standard Investments, with £583 billion under management in 80 countries, warn of imminent collapse in the West?
In particular, he is warning of a collapse in the one asset class traditionally regarded as a safe haven – bonds. The West has reached the end of the road as far as quantitative easing (QE) is concerned. As interest rates drop to zero or lower, central banks will be tempted to fire up the printing presses yet again, but this time banks, pension funds and insurance companies will go bust.
Amstad used some alarming language in an interview he gave with Livewiremarkets.com, warning of social collapse and even civil war in countries such as the US. Fund managers typically have a commercial bias towards rising asset prices.
Those who have lived through a few market crashes will recall the admonition of these managers to remain faithful, trust the markets, and wait for the rebound. And they’ve generally been correct. Up to now.
Massive money printing in the post-2008 financial era has not been particularly inflationary for consumers.
This has given rise to the mistaken notion that money printing can be carried on forever without consequence. But there are consequences.
Those billions and trillions of currency rammed into the ‘economy’ have ended up inflating stock and bond prices, to the ultimate benefit of the 1% of the 1%, while millions of ordinary people lost their jobs, their houses and their livelihoods.
In economic terms, this is called the Cantillon effect, named after 18th Century economist Richard Cantillon, who observed that new money created does not filter through the economy evenly. The first to benefit are those sitting closest to the money, such as banks and big companies. They get to take this new money onto their balance sheets first, spend it, and only later does inflation start creeping into the rest of the economy.
It’s a form of redistribution from the poor to the rich. This is precisely what has happened since 2008.
What has alarmed Amstad, among others, is the fact that so much toilet paper money is floating around the global economy that yields have turned negative.
This means you are losing money by investing in bonds in Japan, Switzerland and elsewhere. Put another way, investors are paying governments to keep their money safe.