Central Bank Credibility on the Line
It is becoming increasingly clear to professional market analysts, if not the general public… yet, that the major central banks around the world are at the limits of the extraordinary loose monetary policy imposed over the last 20+ years.
Despite central bank governor protestations and testimony, ZIRP, NIRP and quantitative easing are failing to deliver any medium term positive effects on economic activity and, to the contrary, further descent into the lunacy of negative rates will force savers to hoard cash outside the banking system, defer discretionary spending and starve monetary transmission channels of savings that are the ‘bedrock of capitalism’ (thanks Bill Gross for the last point).
One only has to look at the performance of Japan over the last 20 years to appreciate that, apart from the very short term benefits of providing liquidity in times of extreme financial stress, ultra-loose monetary policy and now NIRP has done little to foster wealth creation outside of the wealthiest 1%.
The amazing thing is that the central banks haven’t lost all credibility before now; they have been able to perpetuate the fallacy that:
- They know what they are doing.
- They have found a method to counteract the normal business cycles that afford creative destruction and clearance of zombie entities.
- They can spot bubbles and financial stress before it happens.
- Monetary policy is working for the benefit of the general public.
I am far from the first and certainly won’t be the last to rail against Keynesians and the financially repressive dominance of the central banks. Many bank analysts and fund managers are joining less mainstream commentators in warning of the vulnerability of asset markets to a serious downside shock in the very near future. Equity markets no longer reflect prospective company earnings but merely the expected future level of central bank intervention.
Inflating high yield debt and equity bubbles, printing money and debasing fiat currencies, and facilitating low lending standards has historically never ended well; this time will not be different.
Steps corporate clients can take to mitigate financial risk:
- Increase hedge flexibility through option based structures
- Implement a pro-active and rolling FX hedge policy
- Adhere strictly to the treasury policies – review and tighten where necessary
- Review size and duration of credit lines – stress test for worst case scenarios
- Tie banks to committed lines of credit
Derek Mumford, ‘Director’ at Rochford, the leading treasury advisory house in Australia advising on in excess of AU$20 billion in financial market risk.