(Ed note: First published 28th August 2019 - This remains our most popular video of all time, receiving over 750,000 views)
Developed economies are at a crisis point, the powers of unconventional monetary policy are exhausted, and markets are just beginning to wake up to this. That’s the sobering assessment on the current state of the global economy delivered by Donald Amstad from Aberdeen Standard Investments
His view is that when developed markets finally crack, there will be serious implications for every asset class and economy. However, those economies where monetary policy remains relatively ‘normal’ will be those best placed to respond. In his view, the emerging markets have more levers to pull when compared to developed markets, where the money printing taps have been turned on and interest rate settings are near zero.
The irony is that during the Asian crisis it was the IMF and central bankers from developed markets that convinced the emerging market governments not to print money and ‘take their medicine.’ Amstad says that this was a cathartic process for these economies, and they are now looking on in bewilderment as the West has resorts to money printing of an unprecedented scale.
“In the emerging world, economic and monetary policy is broadly orthodox. It is the West that is running unorthodox economic and monetary policy and it is the West, ironically, that is now on the cliff edge.”
Implications for investors
Amstad says that unconventional monetary policy has been pushed to the limit and that negative yielding bonds are playing havoc with pension funds and with the profitability of banks and other financial institutions. He highlights that while the United States is awash with debt, it is the $125 trillion of unfunded government liabilities that is most concerning.
Furthermore, he says that investors are faced with a scenario where the key defensive or ‘risk-free’ asset in their portfolios appears to be in a bubble. Historically, it has been riskier asset classes that have been the source of financial malaise. For example, it was credit markets in 2007, tech stocks in 2000 and equities in 1987. However, during these periods' bonds have acted as a buffer for balanced portfolios, Amstad questions if this will be the case today.
“What we have never had to cope with before is if there is a bubble in the risk-free asset class. What happens when that goes pop. What is the new risk free?”
Central banks have been playing a game of ‘whack-a-mole', using monetary policy tools to quash any flare up in volatility. Under this regime it has been the wealthiest 0.1 per cent of the world population that has benefited from asset price inflation. Amstad argues that we are already seeing financial and economic troubles becoming political and social flare ups.
He expects that these social tensions will only continue to escalate if developed world policy makers are unwilling to take their medicine.
“If they do come out with another bout of QE then banks are going to go bust, pension funds are going to go bust, insurance companies are going to go bust. And if it pushes the stock market back up again, then the 99.9% are probably not going to tolerate more handouts. That leads to social and political instability.”
Watch the full video below for a sobering assessment on the state of developed market economies and the implications for investors.
"I am very worried about the West. I think it is verging on catastrophe and what is interesting of course is the markets are just beginning to wake up to this."
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Best thing I've seen on Livewire.
This is scary
Scary but at least someone has the stomach fortitude to call it as it is. Nowhere to hide nowhere to run.
I don't usually comment much on Livewire, but I am compelled to do so this time. This is easily one of the most concise and bang on points summary of what is wrong with the world today! Kudos to Donald for doing this piece. Now some here might watch this and skeptically think that well bad news always sell... To a certain degree there is truth in that. Furthermore, given well publicised authors who have probably been calling doom and gloom in the past few years have literally been proved 'wrong' by the market so far. But, we have to remember that at the end of the day, everything that was built on unsound foundation is bound to collapse. But with all the DM's Central Banks are now all-in defending this and politicians/world leaders who refuse to perhaps tolerate any short of short-term pain (let alone extreme pain) will just keep the carousel going. This is just pure madness, if they do make the right long-term decision, they would lose the election by a land slide, if they don't, most government are struggling to form majority government given the rise of populism and fragmented nature of politics. Stay safe everyone!
We live in interesting times!
A spot on analysis, I was wondering why all the market analysts are barely scratching the surface of the problem - not going to the very root of it. Burgeoning debt hole in what we call a risk free Asset the US dollar. This is America’s greatest export to the world. Till Nixon era, we had gold standard - they found a way around it - US Dollar became the next biggest peg for everything to be measured in & against, starting from oil. There is a fundamental shift taking shape here. Will the emerging markets take the batten from here? I’ll respectfully differ here. While The emerging economies will only be marginally better placed, as currently their economies are heavily reliant on foreign investments & also, as in China’s case, reliant on exports to the suffering developed economies. There is a shift away from these to (yes, western style :) ) consumer driven economies but it’s not here yet & will likely take another decade at the minimum. At the core of it, the risk free asset takes a turn based on the flavour of the century, it was Asia then Europe, then America ... but historically it has always come back to “Gold”. IMHO with that will be the next stop! & seeing the extremes in currency printing, the magnitude of this shift will be extreme as well. When will this actually crystallise? we don’t know yet, a bit of technical charting may help, but we don’t know for sure. All I can say that, It’s sooner rather than later Thoughts? Sanj G.
Couple of added factors that may affect the analysis, which is pretty spot on. A major black swan event that causes exodus from equities world-wide followed by massive layoffs. Or a formal start of war in Persian Gulf. In such events, bond with negative yields will prove to be better bet than holding equities long-term.
Great video, Don (albeit somewhat sobering). Hope all is well.
I wonder how many bankers, economists, stockbrokers and fund managers have similar thoughts, but for 'business' reasons are keeping quiet?
Good video. But I'm not sure about the investment implications? Long-term I'm sure that EM will outperform DM in the next cycle, unlike the one we're currently in. But for now, does it mean hiding out in the Yen and Gold?
Thanks Donald Great piece, and I agree with your thinking. Except in the case of China, which I understood had high debt levels. I'm also not yet convinced that the capital allocations made by Chinese SOEs over past years will prove economic, and therefore believe the jury is out on whether China's balance sheet is as robust as presented.
Very direct and impacting video. Interesting time ahead.
Good video, albeit there is little in here that isn't already known to many financial markets participants. The party that is this long-tenured bull market seems to be on still - sure, we have had bouts of volatility but they have been quickly been extinguished by accommodation central banks (in tone if not in action), and smaller dips seem to get reversed in a matter of days. What are we to do as investors? Stuff it under the mattress? Buy gold and/or bitcoin? Or continue to trust in our processes, invest in quality businesses at reasonable prices and ride out all the lumps?
Thank you Donald, for being so truthful and factual where other economists are not. You clearly hold your own, very impressive.
If it were possible, and reliable, it would be very interesting to see a China debt clock. However, it is my understanding they simply do not have comparable welfare structures such as healthcare and pensions, therefore have not even made the commitment for them to be unfunded. So perhaps a major and deep crisis in the developed world will see an erosion of some of these expensive safety nets. Effectively trending towards the Chinese model! NHS in UK is eroding all the time.
I just think it strange that he can comment like this - without any clear delineation between Europe and the USA. There are obvious differences between their banks, and central banks, since the GFC. Also, China has actually printed more broad money than the EU, US and Japan combined since 2009.. yet crickets (all the while maintaining a currency with capital controls...). Plus saying brown and black people are under attack in the US, while failing to mention something as serious as this... https://www.amnesty.org/en/latest/news/2018/09/china-up-t... is something I'd expect from a tabloid journalist. USTs are probably the best investment China owns.
So thought-provoking, and if one takes the time to think about the last 10 years, it really should be fairly obvious that governments can't just continue printing money without consequences. What occurred to me is, if the debt clock is accurate, and I can't imagine why it is not, when does the US become insolvent. For every $1 of wealth, Americans have they have 79 cents of debt and that appears to be increasing pretty quickly. And if that eventuates what then?