“Markets have become addicted to stimulus”

Grant Williams of Vulpes Investment Management explains how lessons were not learned after 2008 and now the markets cannot wean themselves off quantitative easing

“Markets have become addicted to stimulus”

With the Federal Reserve set to meet next week, talk of a rate hike has resurfaced. The Fed under Janet Yellen’s leadership has been largely dovish on its key rate, especially considering the relative strength of the US economy. Now that the fallout from Brexit appears to be less a global issue than previously thought, the conditions for a hike appear to be falling back into place.

Grant Williams is managing director of Singapore-based Vulpes Investment Management and the co-founder of financial video-on-demand platform Real Vision. With more than a quarter of a century of experience in the global equity markets, he has strong feelings on the role of the central banks and how they have created a stimulus vortex that is threatening the world’s financial systems. For him, the current volatility dates back to the important decisions not made during and after the 2008 financial crisis.

“With Real Vision I travel all around the world and I talk to the smartest guys in finance,” he says.  “They are all really worried. In 2008 when QE1 started, you could see that natural forces were cut short.”

He continues: “Was there an argument against them starting (quantitative easing) in 2008? No, they did the right thing stepping in – I don’t think most people realised how close we came to a complete meltdown of the monetary system. But should they still be doing it eight years later? The answer is categorically no.  The world needs less debt and more organic growth.”

A rate hike by the Fed can’t come soon enough in Williams' view, but it remains the case that even if the US takes that course, The Bank of Japan and the ECB will likely go in the opposite direction.

“The central banks have got themselves into a really bad situation,” says Williams, “If they came out and said there will be no more stimulus, markets would fall 50 per cent.  They have backed themselves into a corner and it’s getting more and more desperate. As we reach the inevitable endgame of helicopter money, we are getting closer to the day natural forces finally reassert themselves.”

Aside from overseeing operations at Vulpes and Real Vision, Williams also writes a popular financial blog: Things That Make You Go Hmmm. Regular readers will be well aware of this thoughts on the mistakes made after the financial crash, but for the uninitiated: “Had banks been allowed to go bust, or ring-fenced, and shareholders wiped out – these are all the things that capitalism is supposed to do in a down cycle,” he says.  “With the TARP money we could have set up new, completely clean banks. There were many things that could have been done instead of rescuing the organisations that created the imbalances that led to 2008.”

Those imbalances remain in place today he warns, which has created an untenable situation for the world economy. 

“They have created a market where risk is taken onto the public balance sheet and reward has been privatized,” says Williams.  “That’s a really bad precedent to set. Every time the markets wobble there is a stimulus – there has been 658 rate cuts since 2008 around the world.”

It’s a situation that has meant the markets have not taken their medicine when needed, or as he puts it – “If you catch a kid every time he falls out of a tree, he will climb higher next time, fall, and eventually break his legs or kill himself. That’s essentially where we are, markets have become addicted to stimulus and it’s very hard to take away now.”

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