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Are we moving to a world of accommodative monetary policy?

August 14, 2019
Jamieson Coote Bonds

Interest rate cuts everywhere

The US Federal Reserve cut interest rates in July and more cuts could possibly be required. Globally, South Korea, Indonesia, Vietnam, Brazil and Russia all cut interest rates in July, with further cuts likely. The global themes remain incredibly powerful. Europe and Japan need to do more to support their weak economies. More cuts or stimulus will likely be required.

To maintain the status quo of weak growth, weak inflation, but high asset prices, Central Banks will need to keep providing accommodation or risk the house of debt laden cards imploding. Accommodation will almost certainly be provided, as seemingly no central bankers or politicians have the stomach for the darker alternative − kicking the can down the road to build a bigger problem for another day is, the problem for another day. I look at my kids every morning and sigh at the economic world they will face as adults. But alas, we manage assets for today and tomorrow, and today interest rates look likely to continue to fall into the future, challenging long held assumptions about the natural state of financial markets, and the right of savers to earn interest on conservative cash allocations.

The trade war intensifies

The health of global trade has been declining for some time, since the brief global synchronised growth of 2017. Added to this is US monetary policy that is globally restrictive, coupled with a trade war which is killing business confidence. We have written previously that our central scenario for the trade war remains a long and protracted fight, with both sides digging in for a war they cannot lose, which is centred around technology. After the failed US/China trade talks in July, Trump has even tweeted as much suggesting that “China will sign deal ‘almost immediately’ after 2020 win” and (Trump) “suggests China signing trade deal tied to election chance.” This will likely dampen economic velocity, already reeling from steep declines in manufacturing activity the world over. Only India, Brazil and the US have manufacturing sectors that are in expansionary territory, albeit all three of these are slowing rapidly. The majority of the globes’ manufacturing is currently in decline and that decline looks set to remain as trade war continues to weigh on sentiment.

Credit quality illiquidity – learning the hard way

Despite significant attempts to pump the Australian economy since the election, damage from the pre-election slowdown is continuing to surface. The collapse of Ralan and Stellar property groups is a stark reminder for lenders to consider credit and liquidity risks. Adding to this is the freezing of some illiquid global credit funds and some cause for concern is warranted. There is no doubt the yields on offer are tempting in a low rate world, but as a few unfortunate folks are now experiencing, when these structures fall over it happens quickly. Watch the asymmetry of the cycle. Return of capital is always more important than return on capital. Caveat emptor – let the buyer beware.

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