Quay Global Investors: Are central banks losing their effectiveness?

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Chris BedingfieldThe use of low interest rates by central banks to help assist recovery is unlikely to have the desired effect, and may ultimately cause significant market disruption, says Chris Bedingfield, principal and portfolio manager at Quay Global Investors.

“Much of the share market recovery since 2009 has been attributed to ‘easy money’ – including the policy of quantitative easing,” he says in his latest Investment Perspectives paper.

“While the real economic benefits from central bank policy are questionable  – and the US economic recovery has been muted at best – it seems they have not finished with their aggressive approach.

“The question is, will it work?  We think not.”

Chris says low interest rates by themselves have very little impact.

“The main stimulus from low interest rates is an increase in demand for loans, which are then used to acquire assets or goods and services.  It is the newly created money that is the stimulus.

“At very high levels of private debt, however, these lower interest rates begin to lose their effectiveness.

“If banks are unable to source significant credit worthy customers, or the private sector is unwilling to borrow, then the level of interest rates becomes irrelevant.  New credit will not form, and monetary policy loses its effectiveness. 

“More importantly, negative interest rates become a cost for the banks (or their customers if negative deposits rates are passed on).  This reduces net income from the private sector in the same way as introducing a new tax.  Negative interest rates are, at the margin, deflationary.

“Reducing interest rates below zero to stimulate inflation is akin to a hairdresser complaining ‘No matter how much I cut it, it’s still too short’!”

Chris says the long-term impact of the quantitative easing approach is still to be seen, and that it could have significant consequences.

“For example, there has been something of a cottage industry since the last financial crisis, predicting the next ‘black swan event’.  Most are based on forecasting another debt crisis.

“However, we believe it is unlikely that a 2008 style debt crisis will re-emerge so quickly.  In the companies that we cover, we’re seeing that leverage has reduced, pay-out ratios have declined and companies are keeping high levels of liquidity available.

“It seems to us that the next shock is likely to arrive from a surprising source, and one of these sources could well be the loss of confidence in central banks. Central banks are running out of ammunition, outside of the placebo effect of being seen to do something.  But the positive effects of a placebo do not last forever.

“It is really only a matter of time before markets accept the true limitations for monetary policy.  When this occurs, the loss of confidence of the Bernanke/Yellen/Draghi ‘put’ option could cause significant market disruption,” Chris says.


About Bennelong Funds Management

Bennelong Funds Management is a boutique fund manager nurturing a growing suite of asset management teams. Bennelong’s boutique partners collectively manage approximately $6.5 billion in funds under management. It is a wholly owned subsidiary of the Bennelong Group, a privately owned funds management and investment business. Visit bennfundsmanagement.com.au


About Quay Global Investors

Quay Global Investors is a boutique investment manager focused on the preservation and creation of wealth through innovative strategies in real estate securities.

Quay was launched in May 2015 as a partnership with principals Justin Blaess and Chris Bedingfield and Bennelong. Prior to this, the business operated as Quay Real Estate Advisors which was founded by Justin and Chris in 2013.

 The founding partners have over 40 years of collective experience in direct property, equities research, investment banking and investment management across domestic and global markets, giving them a unique skill set and perspective which they bring to the management of a portfolio of global real estate securities.