Central bankers continue to print money as if there were no proverbial tomorrow. But how, asks Artemis’ Ross Leckie, can this all end well?

Good lads. Central banks, arguably, prevented the financial crisis of 2007-09 from being even worse. Thanks to them, the world avoided a global recession, or even depression. The bankers achieved this, though, by printing money. Now, in theory to stimulate growth and inflation and to defeat deflation, they’re still printing money – and how.

Until (relatively) recently, who had heard of such neologisms as ZIRP (zero interest rate policy), NIRP (negative interest rate policy) or UFXInt (unsterilized foreign exchange intervention)? In general, central bankers are short on clarity but long on IOER (interest on excess reserves), RRP (overnight reverse repurchases) and other arcana. That’s before anyone starts on ARCH (Autoregressive Conditional Heteroskedasticity), MACD (Moving Average Convergence Divergence) or refers to the Chinese clearing house for forex whose acronym is, er, SAFE.

One effect of the bankers’ alchemical largesse is that nearly $13.2 trillion of government debt round the world now pays a negative yield. In other words, those who own such debt actually have to pay for the privilege. The median 10-year government bond now yields 1.26%, down from 3.87% five years ago. The resulting good is that by paying much less in interest, over-indebted governments can go on maintaining, with the anchoress Julian of Norwich, ‘that all shall be well, and all shall be well, and all manner of thing shall be well.’


For example, ¥2.185 trillion ($19.8 billion) of 10-year Japanese government bonds (JGBs) reached maturity recently. The bonds, which carried a 1.8% coupon, had been costing Japan’s taxpayers ¥39.33 billion ($356 million) in interest each year. The government has now rolled that issue over into ¥2.185 trillion of new 10-year JGBs – but these new bonds carry a yield to maturity of minus 6.9 basis points. So for the next 10 years the government will receive ¥1.51 billion ($13.6 million) in annual interest – as against having had to pay $356 million in interest each year. You could call it breathtaking, brilliant or barking. But it is hard to see where this will all end.

The central banks now practising NIRP are the European Central Bank (ECB), the Bank of Japan (BoJ), the Danmarks Nationalbank, Sweden’s Riksbank and the Swiss National Bank. Their states represent a fifth of the world’s GDP. Yet they are ‘loosening’ even as the US is ‘tightening’ (mildly); and no-one knows where such divergence will lead. The last time the US pushed and Europe pulled was 21 years ago – when neither the ECB (1 June 1998) nor the euro (1 January 1999) had completed parturition.

The consequences are of course considerable. For example, of the 6,000 British pension funds covered by the Pension Protection Fund, 85% are now in deficit. As a result of falling (government) bond yields, the aggregate deficit has increased by £113 billion to £408 billion since May this year alone. For the companies that make up the FTSE 350 index, aggregate pension scheme deficits went up by £50 billion in August alone. Since the end of February this year, these deficits have grown from £49 billion to £189 billion as at 31 August.

And the desired effects, growth and inflation? From 1965 to 1985, the GDP of the US grew at a compound annual growth rate of 9.2%. From 1985-2005, the average was 5.7%. The ‘new normal’ (even 2%, anyone?) seems a pallid penumbra. Inflation also refuses to do the bankers’ bidding. It peaked in the UK at 24.2% in 1975 and at 14.8% in the US in 1980 (and at 500 billion percent in Zimbabwe in 2009.) “Most measures of underlying inflation do not show any clear upward trend,” the ECB admitted recently, hardly in hyperbole. It’s an improvement on minus 0.2% in the year to April, but even the cognoscenti are expecting only 0.2% by the end of this year.

Source: Yardeni Research

Source: Yardeni Research

For the acme of the new-style central banking, though, one has to turn to Japan. Over and above less unconventional measures, the BoJ started buying Exchange Traded Funds (ETFs) in October 2010 at a ‘modest’ rate of ¥450 billion per year. That was doubled in April 2013 and increased again to ¥3.3 trillion in October 2014. In July this year the BoJ took the ante to ¥6 trillion pa. At this rate, by the end of next year the BoJ will own the entire stock (¥11.5 trillion) of Japanese ETFs – and it is already a top-10 shareholder in 90% of Japan’s 225 biggest companies.

Source: Yardeni Research

Source: Yardeni Research

The effect? The Japan MSCI index (in yen) entered a bear market in mid-January and remains 23% below last year’s high. The stock market isn’t responding to the BoJ’s largesse because the yen has gone up by 24% since last year’s low.

When he chaired the US central bank, the Federal Reserve, Ben Bernanke once said that “the problem with quantitative easing is that it works in practice, but it doesn’t work in theory.” We are not convinced by either. While the questions of consequence and effect are clear, the answers are not.


Now of course there are always questions that may have no answers. Why is there no apostrophe in James Joyce’s Finnegans Wake? Is “wake” a noun or a verb? We may never know whether the book is an exhortation to the Irish (Finnegans) to arouse themselves; or whether Finnegan is an individual and dead; or whether Finnegans (plural) are dead. In late Roman Britain, a number of distinguished chaps held the title “Count of the Saxon Shore”. Was the shore “Saxon” because it had to be defended against Saxons; or “Saxon” because they were already there?

Likewise, the questions surrounding the recent and continuing actions of central bankers may just have no answers – at least not in our lifetimes. One consequence in the meantime for active fund managers is distortion in equity markets. In a world starved of yield, equities giving that are (over-)valued. ‘Value’ stocks (those cheaper than the market) are not. In response to gnostic pronouncements from central bankers, rapid rotations between sectors result; and these rotations stem from sentiment, not (usually) from fundamentals.

In theory, and especially when they’re not (over-) affected by central bankers, stock markets are simple. Their singular concerns are: earnings (e) – and how to value them (price/earnings.) Markets remain amoral (and, yes, are sometimes downright immoral. Every year from 1890 – 1900, as the Belgians grew rich some 500,000 Congolese and other enslaved Africans died of dysentery, malaria, smallpox, beriberi, jaundice, starvation and exhaustion. In the same period, common stock in La Compagnie du Chemin de Fer du Congo rose from 320 Belgian francs/share to 2,850.)

But because central bankers are determining more than perhaps they know, the usual energy of stock markets is being suppressed. Almost 80% of actively-managed unit trusts in the Europe ex-UK sector now have a bias towards expensive stocks. Large-cap stocks such as Nestlé, Unilever, AB InBev, SAP and Novo Nordisk all trade on high multiples of their earnings, given their (modest) growth. ‘Value’ stocks languish unloved.

That is at least a misallocation of capital – and a lot of it. The world’s stock markets are roughly $69 trillion in size and trade about $191 billion in volume per day. Yet one would be brave – and foolish? – to bet against the central banks. As long as they go on printing, distortions will continue. If you believe that capitalism can cure itself, if it is allowed to, there’s nothing else for it but to turn to the enormous consolation in life that WH Auden affords:

“Once we could have made the docks,

Now it is too late to fly;

Once too often you and I

Did what we should not have done;

Round the rampant rugged rocks

Rude and ragged rascals run.”

Ross Leckie is a partner in Artemis Investment Management LLP.

Ross Leckie is a partner in Artemis Investment Management LLP.