Peter Toogood: We Have Seen the Best of the Recovery in Asset Prices

• Inflated asset prices are vulnerable given the deteriorating outlook for profitability globally
• The “recovery” has been in fits and starts with ludicrous assumption that 6-7% nominal world GDP growth is “normal”
• We think the next few months into 2017 will see the peak of the deflationary bust
• Asset prices do not reflect how severe that bust might actually be

Peter Toogood, investment director, City Financial, comments:

“We have remained doggedly cautious with regard to risk assets since last June, arguing that markets were increasingly dysfunctional. After the sell off at the start of the year, we had suggested a strong bounce was due, but we believe that you have seen the best of the recovery in asset prices and we would again be very wary.

“Since the global financial crisis in 2008, central bankers have consciously chased asset prices higher in the hope that it would generate a benign wealth effect. In pockets, this has succeeded – just look at house price inflation in the UK, which has spurred yet another debt-fuelled consumer boom.

“However, the “recovery” has been in fits and starts and predicated on the ludicrous assumption that 6-7% nominal world GDP growth, which was achieved in the noughties, is “normal”. It also ignores the fact that the bulk of the incremental economic growth in that decade was in fact sourced from the emerging markets, which themselves are now struggling due to weaker commodity prices, or credit busts, or both. Central bankers continue to push on a string, but inflated asset prices are as much a hindrance as a positive now, especially when you base monetary policy around their performance. We would argue that asset prices are now very vulnerable especially given the deteriorating outlook for profitability globally.

“The real economy remains vulnerable but the authorities have traditionally responded only when asset markets riot. We still believe that a combination of debt monetisation/forgiveness and a rejection of austerity in the “balance the books” sense is the end game for the global economy and therefore for asset prices.

“The early years of the 1980s were the peak of the inflationary bust – we think the next few months into 2017 will see the peak of the deflationary bust. Unfortunately asset prices do not reflect how severe that bust might actually be.

“Be cautious for now but be alive to the fact that a new bull market will eventually emerge and it will be based on the fundamentals, not the whim of central bankers.”

• Inflated asset prices are vulnerable given the deteriorating outlook for profitability globally
• The “recovery” has been in fits and starts with ludicrous assumption that 6-7% nominal world GDP growth is “normal”
• We think the next few months into 2017 will see the peak of the deflationary bust
• Asset prices do not reflect how severe that bust might actually be

Peter Toogood, investment director, City Financial, comments:

“We have remained doggedly cautious with regard to risk assets since last June, arguing that markets were increasingly dysfunctional. After the sell off at the start of the year, we had suggested a strong bounce was due, but we believe that you have seen the best of the recovery in asset prices and we would again be very wary.

“Since the global financial crisis in 2008, central bankers have consciously chased asset prices higher in the hope that it would generate a benign wealth effect. In pockets, this has succeeded – just look at house price inflation in the UK, which has spurred yet another debt-fuelled consumer boom.

“However, the “recovery” has been in fits and starts and predicated on the ludicrous assumption that 6-7% nominal world GDP growth, which was achieved in the noughties, is “normal”. It also ignores the fact that the bulk of the incremental economic growth in that decade was in fact sourced from the emerging markets, which themselves are now struggling due to weaker commodity prices, or credit busts, or both. Central bankers continue to push on a string, but inflated asset prices are as much a hindrance as a positive now, especially when you base monetary policy around their performance. We would argue that asset prices are now very vulnerable especially given the deteriorating outlook for profitability globally.

“The real economy remains vulnerable but the authorities have traditionally responded only when asset markets riot. We still believe that a combination of debt monetisation/forgiveness and a rejection of austerity in the “balance the books” sense is the end game for the global economy and therefore for asset prices.

“The early years of the 1980s were the peak of the inflationary bust – we think the next few months into 2017 will see the peak of the deflationary bust. Unfortunately asset prices do not reflect how severe that bust might actually be.

“Be cautious for now but be alive to the fact that a new bull market will eventually emerge and it will be based on the fundamentals, not the whim of central bankers.”