There are various periods in economic history when central banks are either more or less in control of markets. Recently, the tide has shifted from central banks having an extremely dominant impact on financial markets. While their policy measures have not yet produced inflation or strong growth, the decline in central bank omnipotence will likely produce significant market volatility—a global macro trend that will pose challenges to investors, but can also provide opportunities.
Guest blogger Eric Peters, CEO and CIO of One River Asset Management, offers his thoughts, as AB provides perspectives from thought leaders in alternative investments.
ERIC PETERS:We would say that, that we are approaching the, the end of the age of central banking “omnipotence.”
You see throughout economic, uh, history, these periods where central banks are either more or less in control of markets, and in some cases they lose control. Those periods where they lose control are extremely disruptive. We are toward the later stage of an age where central banks have really dominated markets. They have so for the last six or seven years. They have done it with “quantitative ease,” they have done it very low interest rates and a variety of other policies. But what we have started to see – and we, we saw it in the beginning of last year with the Swiss, uh, stepping away from their de facto peg between the Swiss Franc and the Euro, which led to enormous volatility in that exchange rate. We have seen this series of moves where central bankers are, are losing…are, are having less control over markets. So the Swiss were the first; the Europeans lost some control over the bund market in the middle of last year; the Chinese lost control over their equity markets in August of last year, it’s a very disruptive period; and then the beginning of this year, we have seen some abrupt moves in the Chinese currency. And so, central bankers are, are losing control. Um, but they are coming from a, a state where they have really dominated markets. But as that happens, volatility, uh, has and will continue to pick up.
Central banks – uh, having been unable to produce the impact on markets and economies that they had, had hoped that they would, um, uh, would create – are pushing the envelope in terms of their actions further and further. Maybe perhaps to liken it to, to being in an unfamiliar shower at a, a, a, at a hotel. You go in there, it’s lukewarm, you turn it a little warmer…it’s lukewarm, you turn it a little warmer…and you proceed until you get to a point where you have kind of given up and then you are, you are hit with an enormous hot blast. And we are… And so you see something similar likely to unfold in markets.