Download The journey of the “financial Magi”

The journey
of the
“financial Magi”
December 2016
Jonathan Marriott
Chief Investment Officer
LGT Vestra LLP
Christmas is a time of celebration, feasting and giving.
It is also a time for reflection, when we look back on the
year gone by and look forward to the New Year. We can
celebrate the successes and try to forget the failures.
The New Year brings resolutions and new gym subscriptions that will
be mostly forgotten by Easter. Christmas and New Year is time for
optimism; reality can wait for the chill winds of February. For many of us,
it is also a time for tradition and when biblical stories are embellished by
retelling.
In T.S. Eliot’s version of the Christmas story, The Journey of the Magi, he
puts into words the thoughts and feelings from one of the three Magi,
the Wise Men, as they make the long and arduous journey to the birth
of Christ. As the Magus looks back at the events surrounding the first
Christmas, he ponders what has changed and if the birth of a new world
was witnessed or rather the death of the old.
When the central bankers of today look back on 2016
after the financial crises of years past, they will wonder
at what changed and reflect upon their actions.
If our financial Magi for 2016 are The Bank of England Governor Mark
Carney, Chair of the Federal Reserve, Janet Yellen and President of the
European Central Bank, Mario Draghi, how would these three Magi
describe their journey?; Are they witnessing a new world of finance and
will they consider it all worthwhile?
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The poem opens, “A cold coming we had of it” describing the hardships
and the regret of leaving “summer palaces on slopes, the terraces, And
the silken girls bringing sherbet”. A reflection on better times.
Do our Central bankers look back on the comfortable life they enjoyed
before the hard times of the financial crisis and consider what difference
they made? In the Christmas story, the Magi bring Gold, Frankincense
and Myrrh - gold as a symbol of permanence, incense for ceremonial
use and myrrh used in embalming and in preparation for death.
The financial Magi of today have brought us low interest
rates, quantitative easing and bank regulation.
These gifts do not have the same power of symbolism - the effects are
not entirely understood and will be argued over in years to come.
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Our Caspar, Mark Carney, arrived from
the West (Canada), rather than the
East, and will stay until 2019 before
returning. As Carney considers his
journey, there is the additional
complication of reacting not just to the
financial crises fall out, but also to the
vote to leave the European Union.
Many consider his actions this year to
be an overreaction and, in the short
term, the economy is holding up. However, the full impact of Brexit and
the falling pound is yet to be felt.
The fall in sterling will add to inflation, but this takes
time to trickle through and inflation from currency
moves does not reflect a strong economy.
Our Balthazar, Janet Yellen, also
comes from the West and hails
from origins in the realms of
academia. She has given us low
interest rates but is starting to
take the gift back. With Donald
Trump in the presidency, Yellen
may want to return home sooner
rather than later. When she
looks back, will she think she
raised rates too soon or not fast
enough?
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Our Melchior, Mario Draghi comes from the South (Italy) and has had the hardest journey of all: trying to
overcome the complexity of a multi-
speed Eurozone economy whilst
trying to accommodate all countries
at the same time. Draghi needs
support from politicians in the
member countries with action to
reform their economies and is
struggling to achieve any real change, not least from his own country.
The Magus of the poem complains of the hostile cities and the unfriendly
towns, to which Draghi can sympathise.
As we look back at these journeys, low interest rates
and quantitative easing appear to have been a doubleedged sword.
They have rescued markets and raised asset prices but this has resulted
in a lack of interest rates on savings. Low interest rates and regulation
has made it harder for banks to be profitable and restricted the ability
to lend. The curtailing of banks’ balance sheets and the consequent
reduction in trading books has reduced market liquidity. This makes
banks safer but makes markets more volatile adding to investor risk.
Gifts that appear practical may not be all they seem.
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The journey of the “financial Magi” may have saved the global economy
for now, but the boost to asset prices has helped the rich who own
assets get richer and has yet to feed through to the less fortunate. Jobs
have been created but these have tended to be in services and at the
lower end. The wealth gap appears to be getting wider and, as we look
forward, it is up to the politicians to do something about this. The rise in
populist anti-establishment parties is a symptom of this and a warning to
the ruling parties.
The Magi followed a star on their journey to reach their destination.
They did not know what they would find, nor did they know what the
consequence would be. The Bank of England and the European Central
Bank have a clear destination in mind; they have a set inflation target
and a clear tool in interest rates.
However, interest rates are just one tool in managing
the economy and inflation is not necessarily a sign of a
healthy economy.
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Government tax and spending, as well as regulation, can impact the
growth prospects. The three Magi of the financial world have given
their gifts to set the ball rolling and it is up to politicians to respond now.
Draghi and Carney have made this point repeatedly but their words have
fallen on stony ground.
In T.S. Eliot’s rendition, the Magi complain of the camel men cursing
and grumbling. Our modern three wise bankers must overcome
commentators and politicians, while sticking the course to their
destination as the Magi of old did.
The Magi witnessed the birth of a new religion, a new world.
Our Central bankers
may be witnessing a
new economic dawn
or perhaps just a false
start.
Trump’s election and the Brexit vote show the power of the populist antiestablishment movement across the world. If we are to move away from
the more extreme elements, the political establishment will have to come
to a new thinking.
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Investing money in infrastructure and education may help close the
wealth gap. Restricting immigration may leave us with a shortage of
skilled workers. Training takes time, and if the UK is to head off this
shortage, we need to start now.
Investing in the future of people rather than assets may
be the way to a more productive and stable economy in
years to come.
The essence of the Christmas story is rebirth and optimism. It is up to
all of us, the politicians and the public, to remember the less fortunate
at this time of year in particular. In the process, we may become less
dependent on the gifts of the Magi.
~
We wish our clients health, prosperity and happiness for
the festive season and the year to come.
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for use only by those clients of LGT Vestra LLP, LGT Vestra (Jersey)
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Vestra or its employees for any direct or consequential loss arising from
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Partnership registered in England & Wales, registered number OC
329392. Registered Office: 14 Cornhill, London EC3V 3NR. LGT Vestra
LLP is Authorised and Regulated by the Financial Conduct Authority and
is a member of the London Stock Exchange.
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