Money printing from the world’s central banks has crushed future returns, crucified pensions funds and created asset price bubbles everywhere, according to City Financial’s Peter Toogood, who adds that ultimately, quantitative easing is “doomed to fail”. 
The significant recovery in asset prices since the global financial crisis has largely been bolstered by extremely loose monetary policies from the world’s central banks.
The likes of ultra-low interest rates (even negative, in certain parts of the world) and quantitative easing have caused bond yields to drop to historic lows while equities have been pushed to record highs.
Performance of equities and bond yields since the global financial crisis
Source: FE Analytics
Though such policies have certainly made those invested in financial markets wealthier, many believe the authorities have failed to achieve the main aim – to spark a genuine and robust economic recovery and stave off the threat of deflation.
As such, notable market bears believe that these long-term unorthodox policies have only created a bigger problem within financial markets.
However, though the Bank of England decided not to act in this month’s Monetary Policy Committee meeting, the consensual view is that governor Mark Carney and its other members will vote to cut interest rates further and reintroduce quantitative easing next month to help protect the economy and support financial markets in the wake of the UK’s Brexit vote during June’s EU referendum.
City Financial investment director Toogood, who said earlier this year that the Bank of Japan’s decision to introduce negative interest rates was the “final straw in terms of increasingly daft monetary policies”, warns that even looser monetary policy from the Bank of England will be massively damaging for the economy, markets and future generations.
“The brutal truth is that years of unprecedented monetary stimulus have crushed the prospects for future returns,” Toogood said.
“These actions have added to the global debt burden which will be hellishly difficult to reduce in a slower growth world. Low interest rates punish savers, crucify pension funds with liabilities to meet, stop creative destruction in the corporate sector and create asset bubbles everywhere.”
“To the fans of money printing, we’d point out that Japan has been trying the same monetary experiment in a variety of guises since the late 1990s, but to what effect?”
The Japanese authorities have been fighting a debt-deflation spiral for a number of decades, though it is recent actions from the Bank of Japan – such as an unprecedentedly large quantitative easing programme and negative interest rates – that many will be aware of.
According to FE Analytics, the Japanese equity market – as shown by the Topix – has returned just 6.91 per cent since January 1990 compared to a 490.26 per cent gain from the MSCI World index.
Performance of indices since January 1990
Source: FE Analytics
Nevertheless, and despite constant warnings from the bears, a situation has developed (which come consider farcical) whereby the market seems addicted to ever looser monetary policy.
Indeed, over recent times, poor economic data has tended to lead to market rallies as investors have expect further stimulus to bolster sentiment.
While Toogood is certainly bearish, he has held this view for some time now. In that sense, his thoughts are similar to Aberdeen’s Bruce Stout, who recently updated the shareholders of his Murray International trust on why he feels now is an important to have a defensive portfolio.
“The three pillars supportive of equity investment, namely favourable interest rates, earnings and sentiment are becoming increasingly exposed to deteriorating fundamentals in a world of constant denial,” Stout said.
“Persistently papering over the cracks of structural fragility, complacent investors have been content to pay higher and higher valuations for equities despite clear evidence of profit headwinds intensifying.”
And yet, despite all the doom and gloom surrounding the UK equity market, it is worth noting the FTSE All Share is up 8 per cent so far this year while global equities have returned 17 per cent.
Performance of indices in 2016
Source: FE Analytics
Toogood said: “We are conscious that momentum is currently working against this thesis, but money printing is destined to fail in the end, as it has done on every previous occasion. No secular bull market starts from this economic backdrop and these kinds of asset prices.”
This bearish mentality seems to be cottoning on, though, with a number of managers taking a more defensive tilt within their portfolios.
For example, Mark Burgess – chief investment officer EMEA and global head of equities at Columbia Threadneedle – says he and his team have cut their equity overweight position to neutral for the first time in five years due to rising risks within the market.
He says the recent rally in risk-assets following the EU referendum is unjustified, especially given the impact Brexit is likely to have and due to other headwinds around the world.
“This rally feels somewhat unjustified and unsupported by the fundamentals. There are going to be a number of headwinds facing the UK economy as it detaches itself from the EU over the coming years, which will likely reduce economic activity in the UK and impact domestic profits,” Burgess said.
“Moreover, at some stage we are going to have to contemplate the possible impacts on the broader economy of the US election result, while disharmony could yet break out within the European Union.”
“We are also mindful of the global debt burden and global overcapacity, and are particularly alert to the alarmingly high levels of non-performing loans in the Italian banking system, as well as China’s ongoing attempts to rebalance its economy.”