A world turned upside down

An asset manager recently told me that their fund has turned away clients on the grounds that they will not be able to guarantee investor returns in this low interest rate environment. As if that was not surprising enough, the fund was promptly swamped with money because clients respected the fund manager’s honesty, and obviously believed that they were a fit and proper person to manage their wealth.

This first thing this illustrates is the difficulty of generating any form of interest income in the developed world – a problem which is only going to get more acute in the coming years as increasing numbers of baby boomers retire and find that their pensions are worth a lot less than they expected. The BoE shows no sign of concern that low interest rates are a problem for savers. Last month, chief economist Andy Haldane indicated that he sympathised with savers “but jobs must come first.” Michael Saunders, the latest recruit to the BoE Monetary Policy Committee, recently noted that “If we thought the adverse side effects of monetary policy easing outweighed the potential boost, then our willingness to use the tool of easing … would be much less … I do not think we are at that tipping point, but that is something we have to be constantly on the alert for.”

In my view this is a complacent assessment of the problems we face. At its most basic, the point of reducing interest rates to ultra-low levels is to bring forward future consumption to the present. As a result, part of consumption activity which would otherwise take place in the future has simply been brought forward in time.  But if you have half an eye on retirement, it will be difficult to convince today’s consumers to spend income now rather than put it away for the future. Indeed, most modern macro models impose a lifetime budget constraint on consumers. And in a low inflation, low interest rate environment that constraint bites hard. Arguably, perhaps, one of the reasons that Japan’s low interest rate policy failed to generate a recovery in the 1990s and 2000s was because in an ageing society, consumers were looking further ahead than the BoJ. Maybe Saunders is right that we are not yet at the tipping point. But we may be a lot closer than many policymakers seem to believe.

The other point the anecdote illustrates is that savvy investors prefer the truth to spin. If an adviser tells me to find other ways to save rather than giving it to them, I am going to find them generally more trustworthy than someone who is going to spin me a line. It is heartening to know that there are honest people out there in finance and that they are doing what the regulator asks of them (I never doubted it: Pretty much all the people I know in finance are honest, but it’s the cheats who make better newspaper headlines). Traditionally in the city, a broker’s word was their bond and if they broke it, their reputation was on the line. But in the world of short-term trading, the incentives to cheat were sufficiently high that a small number of people were tempted to do so, on the basis that they could retire on the proceeds of one lucrative trade. That is less true today. And it was never really true of money management, where fund managers tended to be better rewarded the longer their track record. However, today’s world, where customers flock to those managers who cannot  guarantee above-average returns, is one which has truly turned upside down.