A few days after the Bank of Japan’s decision to step up its quantitative-easing programme, I interviewed hedge fund manager Hugh Hendry (the interview will appear in the magazine in the next few weeks, and there will also be a video available to subscribers).
Last year, Hugh rather stunned his investors – who like to think of him as a counterweight to the optimistically minded investors they also have money with – when he wrote to them saying he had become very bullish on global stockmarkets.
At the time he explained his thinking as being a simple result of the tendency of the global economy to deflation (due to post-bubble deleveraging), and the tendency of the world’s central banks to react to such deflation with increasingly radical monetary measures.
Once, cutting interest rates below 5% was seen as pretty feisty. Now negative interest rates (where you pay the bank to keep your money) aren’t thought remotely odd – one bank in Germany charges savers 0.25% if they have balances over €500,000 – and if you aren’t printing money, you aren’t doing your job.
As long as this central-bank battle with deflation continues, most equities can really only rise. Or as Hugh puts it, “the structural deficiency of global demand continues to radicalise the central-banking community: you need to own stocks”.
So what does Hugh have to say now? Much the same. Low growth will be here for some time (we effectively used up today’s growth during the bubble) and so will disinflation.
This will “terrify” central banks and governments who will feel forced to support asset prices as a result. That’s why the almost shocking scale of the monetary intervention in Japan should come as no surprise – see John Stepek for more on this.
It’s why we should expect the European Central Bank to do something on a similar scale at some point – they can’t fight deflation without the “remedy of fast-rising equity prices”. Hendry thinks we will “see new highs” in European stocks before the end of the year.
Most investors look around today, says Hugh, and see nothing but high prices and risk. But they are looking at it the wrong way around. If central banks have your back, prices don’t matter: there is less risk than usual, not more. You don’t need the “disaster insurance” of buying value.
Not convinced? Then note that every time markets have wobbled over the last few years – in October, for example – one central bank or other has stepped in to make it all OK.
That’s why the S&P 500 has just hit another record high; why European markets have bounced back; and why you have to hold Japan. This is uncomfortable stuff.
We want to be long-term fundamental investors, not free riders on waves of money printing. But as I think I last said when Japan first launched Western-style QE, it is possible that there are also times when we should judge less and buy more.