Developed economies are at a crisis point, the powers of unconventional monetary policy are exhausted, and markets are just beginning to wake up to this. That’s the sobering assessment on the current state of the global economy delivered by Donald Amstad from Aberdeen Standard Investments
His view is that when developed markets finally crack, there will be serious implications for every asset class and economy. However, those economies where monetary policy remains relatively ‘normal’ will be those best placed to respond. In his view, the emerging markets have more levers to pull when compared to developed markets, where the money printing taps have been turned on and interest rate settings are near zero.
The irony is that during the Asian crisis it was the IMF and central bankers from developed markets that convinced the emerging market governments not to print money and ‘take their medicine.’ Amstad says that this was a cathartic process for these economies, and they are now looking on in bewilderment as the West has resorts to money printing of an unprecedented scale.
“In the emerging world, economic and monetary policy is broadly orthodox. It is the West that is running unorthodox economic and monetary policy and it is the West, ironically, that is now on the cliff edge.”
Implications for investors
Amstad says that unconventional monetary policy has been pushed to the limit and that negative-yielding bonds are playing havoc with pension funds and with the profitability of banks and other financial institutions. He highlights that while the United States is awash with debt, it is the $125 trillion of unfunded government liabilities that is most concerning.
Furthermore, he says that investors are faced with a scenario where the key defensive or ‘risk-free’ asset in their portfolios appears to be in a bubble. Historically, it has been riskier asset classes that have been the source of financial malaise. For example, it was credit markets in 2007, tech stocks in 2000 and equities in 1987. However, during these periods' bonds have acted as a buffer for balanced portfolios, Amstad questions if this will be the case today.
“What we have never had to cope with before is if there is a bubble in the risk-free asset class. What happens when that goes pop. What is the new risk-free?”
Social implications
Central banks have been playing a game of ‘whack-a-mole', using monetary policy tools to quash any flare-up in volatility. Under this regime, it has been the wealthiest 0.1 percent of the world population that has benefited from asset price inflation. Amstad argues that we are already seeing financial and economic troubles becoming political and social flare-ups.
He expects that these social tensions will only continue to escalate if developed world policymakers are unwilling to take their medicine.
“If they do come out with another bout of QE then banks are going to go bust, pension funds are going to go bust, insurance companies are going to go bust. And if it pushes the stock market back up again, then the 99.9% are probably not going to tolerate more handouts. That leads to social and political instability.”
Watch the full video below for a sobering assessment on the state of developed market economies and the implications for investors.
"I am very worried about the West. I think it is verging on catastrophe and what is interesting of course is the markets are just beginning to wake up to this."
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