Index Dec14I had a breakfast meeting yesterday with the investment head of one of the world’s major asset managers.  He wanted to understand more about our Great Unwinding concept, and our correct mid-August forecast of $70/bbl oil prices.

After that, we went on to discuss two critical and related areas:

  • Would the oil price stay at today’s levels, and what would be the impact next year if it did?
  • What does this mean for interest rates and will the US Federal Reserve delay its planned rises?

Interestingly, he agreed wholeheartedly that it was financial investors who had been responsible for pushing oil prices to $100/bbl – not the fundamentals of supply and demand.  “We had no choice”, he said.  The Fed had clearly wanted to use QE to devalue the dollar, and so he had to invest in oil as a “store of value”.

His view was that the lower oil price would help to keep inflation low, and so delay interest rate rises till Q4 2015.  This view means he has to continue investing in the markets, even though he thinks they are all wildly over-valued.

His argument was simple, namely that the Fed and Bank of Japan and others are forcing him to invest in stocks as the money earns nothing sitting in the bank.  He is being effectively held hostage by the central banks.

His own personal worry, having experienced the bond crash of 1994, is that whilst everyone thinks they will get out ‘before the market turns’, common sense also says everyone will try to stay in until the last possible moment, to maximise returns.  Then everyone will charge for the exits at the same moment, and there could be blood on the street.

It is a very common view amongst the investors with whom I work.  And it explains why market prices keep rising, as the December Boom/Gloom Index chart above shows, even while sentiment (the Index itself) remains weak.

My key takeaway from the meeting was that it confirms that investors have an unhealthy obsession with second-guessing central bank policy.  This convinces me that something else will appear to shatter this illusion.

My own view, as readers know, is that it will be the ‘ring of fire’ set off by China’s New Normal direction that will dominate markets and the economy next year.  The oil price collapse is a key element in this scenario.

Yesterday’s discussion also highlighted the growing interest amongst major investors in our argument that ‘demographics drives demand‘.  And Bill Gross highlights the issue in his latest Research Note.

Media interest is also growing, with Reuters publishing an excellent analysis this week about the impact of ageing populations, in which I am interviewed.

We will know that economic policy is back on the right lines again, when these are the issues being discussed on all the front pages and television news bulletins.  They are what matter in the real world – not whether interest rates might rise by 0.25% in June or September next year.