How can anyone make sense of today’s markets? That was the oft-asked question at last week's IMF meetings in Washington. As we noted at the time, one of the smarest and most honest answers came not from any finance minister or any IMF report but at a presentation privately offered on the sidelines of the IMF meetings by Axel Weber, former head of the Bundesbank, now chairman of UBS. Weber warned that monetary intervention is causing international spillovers and major disturbances in global markets.
"They (central banks) have taken on massive interventions in the market, you could almost say that central banks are now the central counterparties in many markets. They are the ultimate buyer,"
"So I think the central bankers need to be very careful that they do not continue to produce disturbances in the markets, which they acknowledge – it's a known side effect – but the perception that the underlying impact of monetary policy outweighs the potential side effect in my view is starting to be wrong," he added.
Since the global financial crash of 2008, central bank policy has focused on buying up bonds in large quantities and cutting interest rates to record lows. The Federal Reserve has since looked to unwind its own policy which focused on the Treasury market and the yield curve, but the Bank of Japan and the ECB's large-scale bond-buying programs continue.
"I don't think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention," Weber warned, adding that it often meant investors were making bad choices with where to put their money.
However, as The FT's Gillian Tett details, Mr Weber also believes that, while the banking system looks healthier, markets do not.
The issue that investors need to understand now is that many “markets” are not true market not true, free, markets because of heavy government intervention.
To Tett's mind, this point needs to be proclaimed with a megaphone. It is evident in government bond markets, where the central banks of Japan, US and eurozone currently hold a third, a fifth and a tenth of the outstanding local government bonds.
These distorted markets are increasingly hostage to unfathomable political risk. A decade ago, investors thought (or hoped) they could price western assets by analysing underlying economic values with spreadsheets; political risk was only something that emerging market investors worried about.
Now investors holding US, Japanese or European assets need to ponder questions such as: how much further can central banks take quantitative easing? Are the US and UK governments becoming anti-business? Does the rise of Donald Trump, as well as the Britain’s vote to leave the EU, herald new protectionism?
Most investors are not well equipped for an analysis of this kind. They built their careers by crunching numbers, not pondering social science. They now face an unpredictable and unfathomable world.
To put it another way, the real danger in finance is the not one that tends to be discussed: that banks will topple over (as they did in 2008). It is, rather, the threat that investors and investment groups will be wiped out by wild price swings from an unexpected political shock, be that central bank policy swings, trade bans, election results or Brexit.
“Investors have been driven into investments where they have very little capability for dealing with what is on their plate,” Mr Weber observed. “You can nowadays see the entire return that you expect for a year being wiped out for a single day move in the market. And that is an unprecedented situation.”
This is just one banker’s view. But it comes from a man who has been at the centre of the system for decades and is not a natural alarmist. Investors, in other words, would ignore this three-part list at their peril. So would Weber’s former colleagues — at central banks.
Still we are sure this is probably nothing to worry about…