It’s now almost a decade since the credit crunch first loomed on the horizon, an anniversary few will wish to commemorate.
The traumatic events of those turbulent days have cast a shadow over the last 10 years, and there is little sign of that changing.
The West has suffered a Japanese-style “lost decade”, with near-zero interest rates, stagnating wages, and sluggish GDP growth. Are we set to lose another one?
Trouble in store
Ian Spreadbury, fixed-income portfolio manager at Fidelity, is a worried man. He fears that today’s environment is eerily similar to that of 2007, which saw global monetary tightening, modest inflation, record low bond and equity market volatility, and buoyant share prices… before it all went wrong.
Spreadbury picks out there are three major differences today, and worryingly, none of them are positive.
The first is that global growth is at the lowest level since the 1930s despite trillions of QE and more than eight years of near-zero global interest rates.
Second, the structural factors that triggered the credit crunch have actually intensified: high global debt-to-GDP, the ageing population and wealth inequality. As he succinctly puts it: “The debt bubble is back.”
Finally, Spreadbury says political risk is far greater but investors are ignoring it, indulging in misplaced optimism over the Trump reflation.
I have been surprised at how long the Trump trade has endured. Investors have put a lot of money where The Donald’s mouth is, betting heavily that he will fulfil his electoral promises of a $1 trillion infrastructure blitz, plus massive tax cuts and military spending.
He will have to fight to get these plans through a sceptical Congress, while potentially facing impeachment proceedings over the firing of FBI director James Comey.
If Trump comes unstuck, his trade could rapidly unravel just as financial conditions tighten, amid rising US mortgage rates, a stronger dollar and QE tapering.
No rate hike
It is a similar story in the UK, where sterling and stock markets are already pricing in a Theresa May landslide, while ignoring signs of a wider economic slowdown.
There seems scant chance of the Bank of England hiking interest rates until 2019 at the earliest, assuming Brexit negotiations are concluded by then.
Even 2019 may be too soon. For the last six or seven years, analysts have been predicting that interest rates will rise “next year”. Like tomorrow, next year never comes.
The distortions of cheap money are becoming more apparent by the day, including rising debt, unaffordable house prices, zombie companies surviving on cheap credit, and low business productivity.
Yet hiking rates or reversing QE would tip us back into recession, with rising debts and unemployment. There is no easy way out.
All is not lost, the last decade has been surprisingly good for stock markets, while the OECD reports that every major economy is growing at a stable or accelerating pace, as the world economy picks up.
The recovery will eventually come and when it does, that will really be something to celebrate.