What the new normal looks like

October 29, 2013

After a crisis the most unusual thing can be that things remain the same. For example, apart from media stories of doom and gloom, by and large if you managed to keep your job then the bankruptcy of Lehman Brothers and ensuing financial crisis may not have affected you acutely and life may have, more or less, gone on in the same fashion albeit with a bit more banker bashing than before.

Change as a result of a crisis can take years to manifest itself into a tangible difference. But five years after the financial crisis, and three years after European sovereign debt implosion, some of the long-term market and psychological effects are finally starting to be felt. Here are a few examples:

Low interest rates

In a post Lehman world, a 3% 10-year Treasury yield is considered a major threat to the global economy. Prior to the crisis rates had peaked at more than 5% in 2006. Cast your mind back even further and the average yield between 1980-1990 was more than 10%. U.S. mortgage rates are another anomaly these days: when 30-year fixed-rate mortgage yields rose to 4.7% in May, market commentators were beside themselves about the danger this could do to the U.S. housing recovery and how the end of the American Dream is upon us. However, the average rate between 1990 and 2007 was more than 6%, and it still managed to fuel a house-buying boom (albeit one that ended up doomed).

Low interest rates are also symbolic of a different and altogether more worrying trend in global finance: the cult of equities. Don’t get me wrong, stock market rallies are a good thing, but central bank action (inadvertently or not) is helping to prop up stocks to the detriment of savers. This seems like a strange focus for central banks especially when populations from Italy to Germany, the U.S. to the UK, and even China, are ageing. Traditionally, the older the population the more conservative the investment philosophy, but central bankers seem to be ignoring this core cohort of the global population. We have become so used to low interest rates that we don’t really question when major central banks like the Federal Reserve delay interest rate normalisation, as it did back in September, or when U.S. politicians refuse to drop partisan bug-bears to reach a fiscal deal and thus help foster an environment where rates could rise.

So far, a low interest rate environment has not triggered much public outrage. But if (more like when) the equity market house of cards comes tumbling down then angry retirees could take to the streets.

Not so great expectations

Perhaps the biggest change that has infected global markets and market commentators is the extremely low bar with which we now judge global growth. Take Spain as an example. It exited recession last quarter with a measly 0.1% GDP growth rate, the unemployment rate also dipped to its lowest level in a year in September, however it is still nearly 26%. However, this is what today’s economic recovery for Europe’s periphery looks like. Equity investors are getting excited about Europe right now saying that it offers better value than elsewhere after lagging other global markets in recent years; this has boosted Spain’s Ibex index by more than 30% since the end of June. But if this is recovery, Spain’s fortunes look nearly as grim as they did in the eye of the storm. Investors are not piling into Spain and elsewhere in Europe because they have faith in the recovery, rather because money printed by central banks is so cheap, it makes it worthwhile to invest in risky assets.

Short termism – thwarting innovation

While short-term thinking may not be new when it comes to financial markets, the product cycle has become incredibly short, which threatens to damage innovation for the sake of share prices. Take Apple, for example. It recently announced new versions of its iPhone and iPad. Sure they may be slimmer, lighter and have brighter screens, but essentially they are the same products we have had for years. The focus is on sales of these new gadgets, rather than developing something life-changingly, spine-tinglingly new that will revolutionise the way we live. These days it seems that Apple’s CEO Tim Cook spends more time having conversations about the potential for share buybacks and dividends with big investors than looking over the shoulders of his design and innovation team. The recent announcement of Angela Ahrendts as head of Apple stores may be a good hire – Ahrendts is a brilliant businesswoman – but it will only reap fruit if she has excellent, cutting edge products to fill the stores with.

One of the tragedies of the new normal is that Apple has become corporatised.  If I’m right, then this will inevitably weigh on the pace of innovation and design wizardry coming from Apple HQ in future. I could make similar arguments for Facebook.

Overall, the new normal is more jaded and profit-focused than before. Isn’t that what we said we wanted to get away from after the 2008 crisis? No such luck: maybe history repeats itself after all.

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