Mackenzie Minute: October 27, 2017
Paul Musson, Head of the Mackenzie Ivy Team, looks at links between central bank actions, debt accumulation and the rate of economic growth.
PAUL MUSSON: A couple of things have happened lately in the markets. One I guess is, obviously, Catalonia. They had a referendum and they voted overwhelmingly to leave. What that means for markets in terms of uncertainty, who knows? I mean Brexit happened last year and the uncertainty lasted about a day. The other thing that happened is the Nikkei in Japan set a record for 16 consecutive “up” days. And this is happening, we believe, because the Bank of Japan is the biggest purchaser of Nikkei ETFs. They hold about three quarters of these things. So if the Bank of Japan is buying them, they are going to go up. We don’t believe it does anything for the economy, in fact we think it actually harms the economy, but prices are going higher.
What we are watching out for is what we have been watching for the last number of years which is, essentially, central banks printing money and the resulting debt accumulation and the harmful impact that has on economic fundamentals, which leads to slower economic growth. And that’s what we are experiencing today in the US and globally. There’s been a lot written about how large debt levels in countries ultimately lead to slow economic growth. Even the Federal Reserve themselves are talking about long-term growth being less than 2% and they are eternal optimists.
We are trying to grow our clients’ capital through a full market cycle: an up and a down, and a down and an up. The trouble is nobody knows when a down market is going to happen so we are trying to strike this tricky balance between participating in as much of this mania as we can to keep our clients moving closer to their retirement goals but not blowing them up if we experience another crisis.