Central banks' base rates are now so low that any further reductions are unlikely to have a positive effect
What do you mean, nothing's going on? Markets may look calm on the surface but everyone is paddling furiously below the water line. Since the 11 September bombings, investors have lived in the shadow of widespread expectation of the kind of military strikes that demolish markets as well as enemy targets. As the days and weeks have passed, the immediate fear of all-out war has eased to a sense (probably misplaced) of controlled retribution.
Whether this is a false hope remains to be seen. There is no sure way to predict the economic and political scenario even one day ahead. Many fund managers are taking the view that since there is nothing specific they can do about evolving global military strategy, they have to work with what they know.
The usual round of investment presentations, bids, reviews, analyses and meetings continues but no big decisions are being taken. The market engine is ticking over but many players are not engaging any gear, even reverse. Institutional investors seeking to place new money are being told: 'Sure we'll take it but where usual practice is to be fully invested within a month, we're going to sit on cash for a few weeks to see what develops.'
Monetary authorities, of course, are anxious to avoid this happening. Credit is easier now than it has been for 40 years, in both the US and the UK. Around the developed world, central banks are pumping liquidity into financial systems like there is no tomorrow. In Japan, they will practically pay you to borrow. The US Federal Reserve has thrown caution to the wind, abandoning prudent 25 basis point cuts for great 50 basis point slashes. And in a no-belt-or-braces approach, fiscal policy is being loosened as well.
Now, there is no denying there is a once-in-a-generation political crisis going down. Interest rate cuts make money cheap and soften a currency so consumers at home and exporters abroad can spend and trade without fear of retribution... don't they? Well, yes, up to a point. Then it makes no difference how low rates go, there is insufficient confidence to sustain economic activity.
There is some evidence that the US, especially, is approaching that point. Rates have been cut by 3.5 percentage points since January and other central banks have broadly followed suit. US real short-term rates are now negative. Sure, Wall Street bounced on news of the Fed action it was expecting. But as one trader noted: 'People don't care about rate cuts, they care about feeling safe... and when corporations are going to rebound.'
So here is something I never thought I would write: it is time for key central banks to stop cutting interest rates. Other options must be considered if and when the cumulative effect of action already taken does not feed through. But the last thing the global economy needs at a time of fragile recovery, hopefully towards the end of next year, is a bubble like the one allowed to build in the run-up to the Y2K date changeover and the subsequent fallout.
If you really have nothing to do, why not roll along to the High Court, where the mother of all investment battles, between Merrill Lynch, on behalf of its unruly subsidiary Mercury Asset Management, and the disgruntled Unilever pension fund, is about to commence. In a challenge to the spectacle of Les Miserables, there is an all-star cast from Tony Dye to Dugald Eadie, a chance to glimpse some of the industry's top-rank totty and perhaps the odd tactical lesson to be drawn as well.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress