Mercury Rising and Monetary Easing
Every summer, Monaco is home to the annual Fund Forum International conference, a high-powered meeting of asset managers and fund selectors. The weather outside the conference is invariably gorgeous, but this year, the climate inside the conference was distinctly chilly. Why? The Fed’s suggestion that the flow of money into the markets in the form of quantitative easing might be coming to an end. This was made abundantly clear in recent market activity, but it was just as obvious with the participants at the Fund Forum. Shoulders were a little more slumped, brows a little more furrowed. Bond managers were downright fractious.
This panic looked to be an overreaction: Bernanke has said nothing surprising – the Fed will taper off QE when things start to improve, and only then. He’s not a fool, he knows this recovery has been hard-won, and his actions will take that into account. But still, conference-goers were uneasy and there was a collective amnesia amongst speakers and attendees alike that you shouldn’t “bet against the Fed.”
According to the recent research report that consulted 700 market participants on investing in a debt-fuelled world, what is really concerning investors is financial repression, brought about by a mix of suppressed rates, currency manipulation, and other government actions that favour borrowers at the expense of investors and savers.
Given enough time, this will conspire to distort asset allocations and further decrease the number of defined benefit pensions plans.
How to operate in this new debt dynamic is the question many at the conference are trying to answer. Those to whom I have spoken agree QE has been fundamental in keeping the world from a far worse financial recession than what could have been.
But the flip side is that QE creates much bigger challenges for those who are saving for retirement or, even worse, the 10,000 Americans and 14,000 Europeans moving into retirement every day. While QE tapers off, rates will still be kept low for a considerable period. Government debts are at such a level that they cannot afford to service that debt at higher rates. Conference attendees were counting their lucky stars that, almost everywhere, inflation is staying low – else the damage to investor wealth would be much greater.
Meanwhile, there is near-universal recognition that the European situation is getting worse. This news may have been slow to reach French President Hollande and the supercar-driving citizens of Monaco, but conference attendees were keenly aware of the fact.
Will the European Central Bank’s actions merely prop up weak banks in the Eurozone? Will member governments have the will to persist with unpopular measures against the populist tide? Who’s the next to fall? And what way will the German electorate swing come the elections September? It’s not often you hear these questions repeated at a café on a sunny day in the Côte d’Azur.
There are some common conclusions to be drawn. Managers agree that it’s never been more crucial for the fund management industry to offer sensible, achievable results. Existing capabilities will need to be adapted and forward-looking products will need to be designed. Service will need to be bespoke (that’s “custom-made” for my American readers). Even alpha could well be redefined to “exceeding clients’ needs” rather than “beating the market.”
But even fund managers taking such steps know they will need a wider market lift. If ever there were an uncertain forecast, this is it, regardless of Monaco’s sunny skies.
-Based on my article originally published in Financial News July 1, 2013
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