Bringing back the good old days is so hot right now.
Bring back the Royal Yacht, bring back imperial measures, bring back coal jobs, bring back the simpler times when rosy-cheeked children bounded to church on Easter Sunday without a thought for their chocolate eggs. Bring back predictable politics, caning in schools and really hot lightbulbs; maybe those chimps that smoked fags.
Sensible people such as Financial Times readers can see flaws in a desire to rekindle all of those things. Some of them are barmy, some are pointless and some just plain unachievable even if they were desirable, which they’re not.
Nonetheless, it is a powerful urge for many people, and sensible people such as FT readers are kidding themselves if they think they are immune to it. That desire for the familiar and reliable things in life, the standards and traditions that informed our most contented times, also runs through financial markets.
The sense underpinning how we think about investment and markets has been that, just as soon as we get around the next ugly or inscrutable bend in the road, we can get back to the good old days. You remember the ones, when traders cared about things like second-tier economic data releases and you didn’t know for sure whether the next decision from the Bank of England would be to cut rates, hold or raise.
They were the best of times. None of this nonsense with negative bond yields, no central bank balance sheets running into the trillions. Heck, some of us are old enough to remember when having a US president openly threaten aggression against another sovereign state was at least enough to add a couple of per cent to the Swiss franc. Now President Donald Trump can do exactly that, and the reaction is a huge collective shrug.
Mr Trump is possibly a bad example. He may be the leader of the free world, but it’s never easy to figure out whether to take him literally, seriously, neither or both.
But take South Africa. Its president has unceremoniously dumped his widely respected finance minister, and his hangers-on laugh in the face of the country’s double junking from rating agencies. In response, the rand has wobbled, not tanked, and government bonds just keep on drawing in and retaining buyers after every dip. In between scratches of their heads, seasoned investors are putting this down to passive flows and a glib reliance on hope for a decent outcome. What can possibly go wrong?
The Bank for International Settlements, the central bank for central banks, in an excellent recent paper, strikes an exasperated note in saying markets are at risk of “complacency” and “self-delusion” in appearing upbeat in the face of potential trade wars and crumbling international co-operation.
“There is a disconnect between market exuberance and policy uncertainty,” wrote Luiz Awazu Pereira da Silva, deputy general manager of the BIS, and Elod Takats, its senior economist.
These are reminders that markets, how they work and how they relate to each other, have changed in ways that may be permanent. This is not a new idea, as such. Whingeing that central banks, high-speed traders and exchange traded funds broke the markets and made it impossible for old strategies to make money these days is practically an Olympic sport, the ultimate dog-ate-my-homework excuse.
But it is outright dangerous to expect that cycles will kick in when and how they normally would. Stocks have been climbing for too long; it is time they pulled back, right? If the US is on a steadier growth path, government bonds will glide lower at a manageable pace. Right? Sure, probably, maybe.
As Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, put it in a recent quarterly note, normalisation from a 5,000-year low in interest rates, a 70-year low in fiscal stimulus across G7 nations, an all-time high in the US stock market versus the rest of the world, and a 75-year low in bank stocks, is “unlikely to be peaceful”.
He advised clients to buy gold in anticipation of “potential manias, panics and crashes”. That, in turn, assumes that gold would still act as a haven in such conditions — a big ask for a lump of rock.
As he puts it: “It ain’t a normal cycle.” Don’t expect the well-worn patterns to hold.
Katie Martin is the head of FastFT