The last week has seen a confluence of events that suggests we may be reaching the terminal point of the financial markets merry-go-round - that point just before the ride stops suddenly and unexpectedly and the passengers are thrown from their seats. Having waited with increasing concern to see what might transpire from the gridlocked US political system, the market was rewarded with a few more months' grace before the next agonising debate about raising the US debt ceiling. There was widespread relief, if not outright jubilation. Stock markets rose, in some cases to all-time highs. But let there be no misunderstanding on this point: the US administration is hopelessly bankrupt. (As are those of the UK, most of western Europe, and Japan.) The market preferred to sit tight on the ride, for the time being. Three professors were awarded what was widely misreported as 'the Nobel prize in economics' for mutually contradictory research. What they actually received was the 'Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel', which is not quite the same thing. But then economics is not a science, and Eugene Fama's 'efficient market hypothesis' is not just empirically wrong, but dangerously so. History, it would seem, is clearing the decks. Perhaps the most intriguing development of the week was the news that Neil Woodford would soon be retiring from his role managing £33 billion of other people's money at Invesco Perpetual to start up his own business. It was widely reported that Mr. Woodford nursed growing frustration at the short-termism of the financial services industry. We will return to this theme.
David Fuller's view I am always interested to hear what Tim Price has to say, although I do think he errs on the bearish side. In particular, I will take exception to the "hopelessly bankrupt" comment in the middle of the paragraph above.
Governance is Everything, as FT Money emphasises and too often mediocre governance is the norm rather than the exception. However, to describe entrepreneurial and developed economies as hopelessly bankrupt because of human errors sounds way too pessimistic to me.
True, we had plenty of excesses in the latter stages of the last secular bull market, not least among banking sectors, which was ending in the late 1990s. The subsequent retrenchment has been particularly painful, with central banks either taking over much of the excessive debt or at least easing the cost of it with very low interest rates. This is responsible action in a crisis because CBs can fund debt at lower rates than anyone else.
Left of centre governments are too often obsessed with redistribution rather than encouraging, or at least not blocking, a developed nation's entrepreneurial flair. Nevertheless, how can an enterprising country such as the US be hopelessly bankrupt? Led by its world-class corporate Autonomies, the US has the drive, ability and technological advantages to grow out from under its debt mountain.
People who say that the slow recovery proves that our problems are worsening, lack historical perspective. I have repeated this point so many times, not least in Audios, but how can an economy grow quickly following a credit crisis recession when everyone is deleveraging? Once corporate and personal balance sheets are largely sound, growth rates improve.
This reconstructive process usually takes at least five to seven years. It is being led by corporations. In the Western countries mentioned above, plus Japan, how many big corporate bankruptcies have we read about in the last two years or more, not least relative to increases in corporate profits? It takes longer for for salaries to increase and for household balance sheets to improve, but it will happen. All we need is for government policies not to stand in the way of a healthy recovery.