Is the party nearly over for equities?

So is it onwards and upwards for the asset party?

The US Federal Reserve has not only stood pat on interest rates; it has effectively guided up expectations for loose monetary policy by saying it wants to exceed its inflation target and anticipates two interest rate rises in 2017 instead of three.

Coming in the context of the European, Japanese and UK central banks ramping up monetary stimulus, stock markets have soared again.

As interest rates dwindle to favour owning equities, it is hard to counter this ingrained central banks' policy. But a few highly placed critics do exist.

Has central bank wizardry run its course?


An immediate response from Los Angeles-based TCW Group (with £150 billion equivalent under management) was to warn: 'The time has come to leave the dance floor.'

US corporate debt has soared from $2 trillion (£1.5 trillion) to $6 trillion, a record 2.4 times collective earnings, and with debt rising faster than income available to service it, asset bubbles will inevitably collapse.

This also explains the Fed's hesitation to raise interest rates, while US firms appear in quite an earnings recession and with declining productivity.

While the US leading indicators index keeps edging up, 2001 and 2008/09 history reminds us that a recession hits up to two years after these measures peak.

Warm growth combined with easy monetary policy is the ideal 'Goldilocks scenario' for equities that investors are responding to, although profit warnings will challenge this positive trend.


A latest critic of central banks is Professor John Eatwell, a leading Cambridge University economist, Labour peer and chief economic adviser to Neil Kinnock from 1985 to 1992.

This is relevant because he's a long-established Keynesian interventionist rather than free-marketeer. Yet he has joined with John B Taylor, a former US Treasury official, for a steely letter to the Financial Times, which was re-published on Taylor's blog with further context.

They argue that current policies will result in serious instability as and when the monetary stance is adjusted and asset price inflation unwinds.

The letter responds to Mark Carney, Bank of England governor, indicating willingness to cut rates further from their historic low of 0.25 per cent - although in early August his deputy governor guided rates lower later this year when pressed on this by John Humphries on the Today programme. Taylor also has the Fed in his sights.

There's also an interesting June 2016 presentation by Richard Koo, chief economist at Nomura Research Institute, who contends that central banks should remove the punch bowl well before the asset party is over - and specifically before a mass of private borrowers return.

Stimulus measures were appropriate in response to the 2008 crisis but have lasted too long and created distortions.

Such a view is effectively represented by three 'hawks' on the Fed board of governors actually dissenting from its latest decision to defer a rate rise, versus four 'doves' in favour.

Possibly the doves argued inflation is rising only very slowly despite soaring corporate debt, i.e. fears such as Koo presents are overdone.


The US economy has benefited from a steady expansion of government spending, as expected of a Democrat administration addressing a demand gap since the 2008 crisis. The UK likewise is a mixed economy where the government is a strong influence.

But since George Osborne's austerity measures, it's interesting to note how FTSE Mid 250-listed Mitie Group, which provides outsourced services to councils, has had to warn on profits as management protest that it's been taken by surprise at the severity of change.

Central government budget cuts are limiting councils' spend on social housing; and councils have also sought price cuts from Mitie's healthcare division which provides homecare for the elderly; cuts to an extent such business is unviable.

Some investors have criticised Mitie's management - also for its recent years' accounting - as it struggles to deliver growth rates that impress the stock market.

Yet there's a parallel in the way Aim-listed Lakehouse upset investors by not cautioning early enough that government-imposed rent reductions in social housing were impacting councils' outsourced spending.

Mitie has also cautioned the higher national minimum wage is hurting margins more than originally anticipated, so unless this management hasn't budgeted capably enough, it's a factor to beware more widely across UK service firms.


Otherwise, investors are taking heart from there being no real impact of the Brexit vote on the economy. A string of investment bank experts have switched downgrades to upgrades - with an average 2016 GDP forecast re-rated to 1.8 per cent growth from 1.5 per cent last month.

Consensus is back where it was pre-referendum. The Office for National Statistics cites no sharp collapse in consumer confidence or ill-effects on the manufacturing industry. A UK services index due and a preliminary estimate of third quarter GDP at the end of October may reveal more.

Mind the government's challenge to achieve better control of UK borders while retaining full access to the EU single market.

Yet the Brexit vote and proliferation of similar politics across the EU may mean its leaders compromise on border control as a means to pre-empt demands from the Far Right becoming the new consensus.

Furthermore and despite the EU leaders presently talking tough on trade, raising tariffs on both sides would jeopardise the European economy - oddly, while the European Central Bank pursues quite desperate stimulus measures.


The main profit warning was Mitie's because it hints at wider influence of fiscal policy, unless the Theresa May government changes George Osborne's tack and the minimum wage.

This last week has also seen warnings from Majestic Wine and womenswear retailer Bonmarche Holdings. Yet retail is particularly dynamic and online is impacting high street outlets.

Cenkos Securities has seen its profits plunge 91 per cent, but smaller company stockbroking is classically 'feast or famine' and the EU referendum has indeed deterred capital-raising.

It's still important to pay attention to such warnings lest they conflate into a trend. They don't currently seem offset by companies beating expectations.

In summary: markets' rallying response to the Fed's inaction shows a consensus that central banks can keep the party going for now. Mind their critics, though, who are from the financial/economics establishment itself.

What's tricky is judging whether 'now' represents 9pm or 11pm before midnight strikes, and a change to pumpkins and mice.

This article was written for our sister website Interactive Investor.

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