For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Once capitalism started to overthrow communism, back in the Cold War, a very strong narrative was seeded: centrally planned economies don’t work and the free market is the only way forward. That might well have been the sense at the time, but over recent decades markets and economies have become increasingly centrally planned, and therefore less free market orientated, whether you care to look at the public or private sector.
Starting with the public sector, the reality is that governments, and their agents such as central banks, are very much involved in controlling economies and financial markets. The Global Financial Crisis (GFC) saw many central banks step in to use unprecedented tools, such as Quantitative Easing (QE), and arguably there was a good case at the time for this action. However, these tools are still being used and many central banks still own a material amount of their government’s bonds, despite the GFC being long gone. That said, it’s not all bad news, the more recent higher central bank rates are a positive step forward in enabling better capital allocation.
Higher US rates will encourage more efficient capital allocation.
Source: Bloomberg 03.01.2006 to 14.05.2024.
Perhaps it isn’t surprising that the authorities didn’t give up their new QE powers, power tends to be quite addictive after all, but government bond markets are still very manipulated and are not operating in a free market. This is important as the actions of bond vigilantes, through the transmission mechanism of government bond markets, were a way that some discipline was applied to government spending, which brings us on to the next point.
Post the GFC, the subsequent major global economic crisis was brought about by the Covid lockdowns. First, economies were closed down centrally, and then central authorities tried to mitigate the risks related to the economic shut down. Again, central banks got involved in a significant way, but it wasn’t just monetary policy this time, massive government spending was also introduced.
Again, this might well have been the sensible response at the time. However, the lockdowns are long gone, and the rule book has since been rewritten for fiscal spending, in part because the lockdown shock changed the narrative around government spending but also because bond vigilantes have had their wings clipped by previous government action, i.e. QE. Examples of new fiscal spending, very much driven by heightened geopolitical tensions, are the US Inflation Reduction Act and the CHIP Act, which between them amount to around US$ 400 billion.
More recently, we have seen the Japanese Ministry of Finance trying to limit the degree to which the yen weakens, although this is not the first time they’ve done this, nevertheless there seem to be few objections from free market proponents. These are just some examples which throw cold water on the idea that we have free markets. We have increasingly centrally controlled markets and economies, through the actions of governments and their agents.
Turning to the private sector, the growth of technology has been very impressive over recent years, but many of the big tech companies, and these are some of the biggest companies in the world, are operating as monopolies and, therefore, not in an environment of unrestricted competition, which is how many define free markets.
There is a debate around whether or not these companies are in fact monopolies, some are clearly more so than others. They have sometimes avoided accusations of monopoly as they are offering cheaper, or optically free, services or demonstrably better services, e.g. faster delivery. In addition, monopolies are often accused of stifling innovation and, while that may well be true, it’s also easy to argue that these companies are also innovating, even if they are smothering competition in some cases too.
Either way, whether they are monopolies or simply big conglomerates, they benefit from many advantages typical of monopolies. For example, from economies of scale, high barriers to entry and their lobbying power, and therefore they are curbing free markets.
Of course, in practice, there is no such thing as a completely free market, as they are always constrained to some degree. However, massive monopolies and material government intervention are becoming more and more powerful and, by definition, markets are becoming less and less free.
What does this mean for economies and financial markets? Crucially, ‘price discovery’, i.e. assessing the fair price of an asset, which is the essential function of a free market, is being materially and increasingly disrupted by large organisations in both the public and private sectors.
As a result, looking at traditional factors such as supply and demand in economics, or stockpicking in fund management, is increasingly only part of the story. From an investor perspective, the pragmatists will have performed much better than the purists, as price discovery has become increasingly disrupted. Going forward, it seems unlikely that these new powers will be voluntarily given up and indeed, come the next crisis, arguments will no doubt be made for new powers. As a result, it’s difficult to argue that there will be a return to anything that resembles free markets in the short to medium term.
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