The online multi-asset trading and investment specialist Saxo Bank has warned that what it calls a “planned economy” based on “extend and pretend” is heading towards breaking point.
Saxo Bank chief economist, Steen Jakobsen, warned that central banks and policy makers have for too long bought time by pumping asset markets with zero interest rates and QE. This may have forced investors to take greater risks on the lack of alternatives and allowing companies to boost share prices with huge buybacks, often with cheaply borrowed funds. However there is now an increased risk for asset re-pricing and a period of zero or even negative returns. This has forced investors to take more risk and enabled companies to boost share prices through huge share buybacks, often with funds borrowed at cheap rates. Jakobsen commented: “The global market is closer to the Soviet Union in 1989 in its political and economic structure than to a freely-traded market. The inability to move all the printed money into the real economy remains the central issue and solution to the economic dilemma. The ECB’s move into negative rates in 2014 could turn out to be the catalyst for change, especially since 35% of all European government debt is now trading at negative yield.”
Jakobson added: ”If you are a company, it is difficult to keep sales volumes going up when your consumers are not taking part in the recovery. The conclusion should be that an economic system which does not allocate capital to the highest marginal cost of capital, and which continues to support the one per cent versus the 99 per cent ultimately comes full cycle to a point where the expected return of everything is zero again.”