A broker reacts at the stock exchange in Frankfurt, central Germany, on Tuesday Sept. 16, 2008. European stock markets fell again on Tuesday caused by the U.S. financial crisis. (AP Photo/Daniel Roland)
Some investors fear we will look back on the messages from Mario Draghi and the Fed with a sense that we were at the peak of global monetary madness © AP

We now know what weary, miserable investors want to hear. The answer came just minutes after last week’s fund manager survey from Bank of America Merrill Lynch showed that investors were the most gloomy since the financial crisis of 2008. As they sat sobbing into their lattes, wracked by fears of trade wars and a global slowdown, a hero came along to turn that frown upside down: Mario Draghi.

The outgoing European Central Bank president managed finally to make investors listen to the message he has been trumpeting for the past couple of weeks: he is prepared to cut rates and buy more bonds in an effort to support the eurozone economy in the sunset weeks of his tenure.

Suddenly those forlorn fund managers were wiping away their tears, cracking smiles, and punching the big green button marked “buy stocks”.

“In two to three hours, we had a complete change,” says a bemused-sounding Kasper Elmgreen of Amundi Asset Management. The refreshed exuberance was bolstered further when the US Federal Reserve added its loud voice to the dovish choir later in the week.

Not to spoil the party, but some investors fear that, in the coming years, we will look back on these messages from Mr Draghi (or “Mario D”, as US president Donald Trump labelled him on Twitter) and the Fed with a sense that we were at the peak of global monetary madness.

The concern here is that central banks have tried all this before with, by some metrics, limited success. Since the global financial crisis central banks have slashed rates and pumped trillions into the bond markets, and they still cannot hit their inflation targets.

In fairness, central banks are using the only tools at their disposal, but it is striking that they are revving up to take broadly the same steps yet again. “For me, we are into the realms of the insane,” says James Athey of Aberdeen Standard Investments. “We are doing the same thing over and over again and expecting different results.”

Amid this sense of exasperation, investors are starting to wonder what is next. If yet more rate cuts and yet more bond buying fail to do the trick, then what? That is why some previously fringe concepts of how monetary policy could work are starting to hit the mainstream.

Jim Cielinski of Janus Henderson suggested at an event last week that central bankers could be close, very close, to effectively ripping up their mandates and trying something new. This possibly includes so-called modern monetary theory: crudely, a project centring on printing cash to fund fiscal expansion.

“Think how brazen that idea was just a year ago. It was ludicrous. What a silly concept,” he said, describing some elements of the framework as “bunk”.

Over dinner in a plush corner of Mayfair — an unlikely forum for a serious discussion about what many see as a lefty pet project — Mr Cielinski noted that while MMT may seem unlikely now, “things move fairly quickly”.

“I can promise you that in ‘09, I wouldn’t have talked to anybody who said rates were going negative, anybody who said wait a year or two and there will be $13tn of negative yielding bonds. You will pay somebody to take your money, central banks will be buying trillions of dollars of assets . . . including corporate bonds. You would laugh them out of the room.”

Now, of course, all that is the bedrock of global markets. We consider it to be normal. Why not push the boundaries just that bit further? “Even central bankers, when their backs are against the wall, they do look for things in the toolkit that weren’t there before,” Mr Cielinski said.

If conventional policy, which was thought to be unconventional such a short period of time ago, does not work this time, then it may be time for investors to brace themselves for a brave new world. Some are already starting to.


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