Recessions and market collapses usually occur when central banks and governments decide they need to rein things in to control inflation. I do not see any need of that in the advanced countries of the world any time soon. I am continuing to run the FT fund with the maximum 60 per cent allowed in shares under the risk control rules we used when setting it up, where 50 per cent bonds and 50 per cent in shares is the neutral position.
As a central banker once put it, they see it as their job to remove the punch bowl when the party is in full swing. This time there is some suggestion they might remove the punch bowl before many people have had a first drink.
It reminds us what a silly metaphor it was. What's the point of a party without a punch bowl? Why do we have to end the party, rather than hold one where people enjoy themselves without getting excessively drunk? Why do some think there is a binge under way when you look at the modest growth figures, low retail price inflation, and the abundance of goods and commodities available on markets?
It is true there has been binge buying of financial assets. Much of that was done by the central banks themselves in a desperate attempt to offset the contraction of credit they had helped instigate with their boom/bust regulation of the commercial banks.
Once they decided from 2008 onwards to demand much more cash and capital from lending banks, they needed to do something to offset the fall in money and loans in the private sector. They decided on the course of buying up very large quantities of government paper, inflating its price and forcing down interest rates. They became aware that, far from having a party, the private sector was in danger of dehydration and needed some liquidity to keep it going.
Today these same central banks are arguing among themselves over when and how they tiptoe back to higher interest rates and fewer holdings of government bonds. The US has got further with this dialogue: it has now put up rates three times and is talking about reducing the volume of bonds it owns as those bonds reach maturity and fall for repayment. The latest testimony from Janet Yellen implies they don't want to stop their party just yet.
Andy Haldane, the Bank of England's chief economist, is flirting with higher UK rates, though Bank governor Mark Carney may disagree with him. The European Central Bank is thinking about reducing the amount of new money it creates to buy yet more bonds, while the Japanese Central Bank is still in full party mood. It has discovered that in Japan it can order plenty of drinks, but it does not mean the partygoers will swallow them.
Why does all this matter? After all, the world economy is growing. That means more turnover and profit for world companies, more dividends and share buybacks. This is all positive for share prices overall. The problem is the professional investors have got used to central banks keeping rates low and buying bonds off them, and are concerned if all that stops.
Many in the markets spend more time analysing the last often unimportant statement of a member of some central bank rate fixing committee, rather than understanding the figures for real activity and company success. These big macro questions are thought to be the main determinants of outcomes, and central banks are thought to be the new masters of the universe. Understand the masters and you too can command the unruly markets.
I take a more nuanced view. Yes, central banks can have an important impact, but they are not in full control. The Bank of England is busy trying to limit credit to parts of the housing and the car market. That will have a modest depressing effect on the economy. It reinforces the deadening effect of higher property taxes on dearer homes and buy-to-let properties, and the hit to dearer car sales from higher vehicle excise duty.
The Financial Policy Committee of the Bank, which monitors financial stability, is busy looking for trouble in consumer finance and trying to rein it in a bit. The central bankers may also be buffeted by markets themselves, as a lot of their forecasting rests on extrapolating from current market moods and prices.
Remember how the Bank of England told us that it might put rates up when unemployment fell below 7 per cent, only to cut them again when it was below 5 per cent? Remember how it said it might raise them when real incomes rose, only to avoid doing so when that did happen? Central banks have difficulty forecasting their own conduct, let alone that of everyone else in the economy.
So I am keeping the fund as fully invested in shares as possible. The world should enjoy another year of modest growth and remain yield hungry with such low bond rates. As I hoped, the digital revolution remains a central driver of change. The G20 communique reminded us the powerful countries of the world want more growth. This will limit the scope of their independent central banks to call time on a party at which many have yet to arrive or have their first drink.
John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing.
