BTIM’s Vimal Gor says central bank power is ‘grotesque’

BTIM's Vimal Gor Says Central Bank Power Is 'grotesque'

Source: Financial Review

Bond fund manager Vimal Gor has likened the incredible concentration of power within financial markets to something out of The Matrix and a nod to Elon Musk’s theory that we are living in a computer simulation.

“Everyone tells me the world I live in and the markets I position in are capitalist and democratic, but then why does it feel so much like a dictatorship where unelected people control everything?” Mr Gor, head of fixed income at BT Investment Management in Australia, asks in his latest investment update.

Billionaire Musk, who runs Tesla, has publicly speculated on the possibility that the world as we know it is a computer simulation, estimating there is a “one in billions” chance this is the case.

From his perspective, the enormous power central banks have assumed is not that far removed from the kind of world depicted in popular science fiction.

For the most part, central banks are institutions run by unelected academics who set interest rates. Their ability to print money makes these banks uniquely powerful organisations exempt from the democratic process.

“For some reason, however, the central bank is also seen as the beacon of capitalism,” the fund manager says, in a nod to monetary policy’s questionable ability to target and drive growth.

However, fiscal policy inaction means “the central banker’s role has morphed into something grotesque” and central banks influence everything from the level of share prices to the banking cycle.

“Unfortunately the envelope is being pushed even further, and we are now stepping into the realm of highly experimental easing techniques that could cause some serious harm. Plus there is no longer any market mechanism to warn or discourage some of these practices because the bond vigilantes have been tamed.”

Mr Gor underscores the absence of personal accountability in monetary policy-making, and references the widely accepted theory that post-crisis policy responses have worsened inequality.

Regarding valuations, Mr Gor’s point is that by controlling interest rates, central banks also distort the way every other asset class informed by interest rates is valued, including property, shares and commodities.

“If the risk-return trade-off is skewed or altered for government bonds, then it follows that the risk-return trade-off is skewed for all riskier assets above it,” he says.

But that means deviating further away from pure capitalist theory, he argues.

“Doesn’t this mean that the way global economies and markets are now run is either the communist model or a dictatorship masked as a capitalist democracy?” the fund manager writes.

“The slow transition from a capitalist society to a communist-lite one isn’t in our view just a thought experiment, it is there in fact.”

From an investor’s perspective, it means the market is no longer making up its own mind about risk and value.

At the same time, protectionist policies are growing in popularity as a means of responding to dissatisfaction in the electorate.

Mr Gor doesn’t think the origin of central bank interference lies in the response to the financial crisis; rather that it started 30 years before that.

Nor does he see how monetary policy can solve the problem of stalled productivity growth and unfavourable demographics.

“The death of the demographic dividend has been staring economists in the face for about 20 years now, but policymakers have done nothing to accept it. Cutting interest rates and amassing more and more debt has been the only response,” he says.

“What we are starting to get worried about is that central bankers look like they are getting geared up for the next assault.”

The Bank of England has revealed post-Brexit stimulus, and the Bank of Japan will lead the next wave of monetary intervention with helicopter money, BTIM predicts.

Other investors have speculated an FDR-style package of state-sponsored growth is coming.

“We have no issue with governments taking advantage of super low interest rates to provide fiscal stimulus, but printing money to do that is a step that should be taken with incredible caution. History hasn’t been kind to those countries that have stepped down this route,” Mr Gor observes.