The Great Debate UK

What the new normal looks like

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.