Wildfire Ensues from a Monetary Policy Spark

By Jamieson, Bill | The Scotsman, May 23, 2016 | Go to article overview

Wildfire Ensues from a Monetary Policy Spark


Jamieson, Bill, The Scotsman


Raging forest fires in northern Alberta, Canada have brought dramatic headlines. An accumulation ofleaves and pine straw together with dry conditions made for an awesome conflagration - a natural disaster just waitingforaspark.

It doesn't take a leap of the imagination to see the parallels in financial markets: periods of seeming calm and serenity brought to a sudden and fiery end.For John WynEvans, head of investment strategy at wealth manager Investec, these conflagrations have informed his latest briefing note to clients. He was in South Africa when fires were raging across the Cape Peninsula, inspiring him to write about the natural cycle of burning and new growth as well as the evolution of the insurance industry. Two weeks ago he was in Canada when the fires around Fort McMurray were burning outofcontrol.

This may prompt nervous Investec clients to ask which country he plans to visit next. But he raises a sage point about market combustibility: "One could say itwas a catastrophe waiting to happen -itjust needed a catalyst, in this case a spark. It is as yet unclear whether itwas provided by nature or humans. Withoutthis spark the forests might well have remained unscathed for years, but the apparent equilibrium of nature would have been illusory. Financial markets display many of the same characteristics."

For investors, the analogy will ring loud bells. Market behaviour often seems to conform to long periods of uneventful growth brought to adramatic end by ferocious, wealth-destroying fires. Barely has the acrid smell ofburning filled our nostrils and the hoses made ready than portfolio values have disappeared in flames.

It's a comparison that also prompts many questions. How do we know when the ground underfoot is dangerously tinder dry? What is the spark that sets off the conflagration? And what prudentaction can we take to mitigate the fire damage?

Wyn-Evans is one of the UK market's most engaging commentators and has given numerous talks to Investec clients in Glasgow and Edinburgh. He is a wary observer, but not one of the apocalyptic forest forecasters constantly warning of market catastrophe ahead.

Certainly, there is no shortage of"spark" events - an unpredicted geopolitical shock, a change in tax policy by governments, or a central bank change in interest rates or monetary policy which triggers unintended consequences. …

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