A Tour de Force!,
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This review is from: The Road to Recovery: How and Why Economic Policy Must Change (Hardcover)
I read few books like this any more, but was attracted by Martin Wolf’s review and Andrew Smither’s name. I knew Andrew when I was doing investment management and he had a brain the size of a small planet! The book doesn’t disappoint at all. It is by far the most stimulating piece I’ve read on the economy and markets for ages. So impressive, that I’ve written my first ever Amazon review!
The book is very clearly written with 128 excellent charts. I won’t reiterate the main arguments, but there are interesting and original ideas on almost every page.
I’m not an economist, but my only small quibble is that he might give the economics profession too hard a time in chapter 15. Whilst developing the potentially negative aspects of quantitative easing (QE), he doesn’t give credit for the development of monetarism. These ideas clashed with neo-classical Keynsianism in the 1970s, and the influence of Friedman on Bernanke lead to the Fed heading off the threatening debt deflation in 2007-9. Economics has developed.
Having said that, it is depressing to find the Equity Risk Premium (ERP) trotted out to suggest equities are not overvalued in the Bank of England’s latest Stability Report. This is despite Andrew saying in the book that he gave a talk at the Bank on valuing equities. It is clear from the Stability Report that the authors either haven’t read Andrew’s book or disagree with parts of it, because the book includes a devastating critique of the ERP.
This illustrates a central criticism of central bankers in the book. Their academic training has led them to believe in the Efficient Markets Hypothesis, which denies the ability to spot bubbles. The book was written when the S&P 500 index was 1500, but it is now 20% higher. Extrapolating from one of the charts in the book (using CAPE and Tobin’s q) it is probably about 70% overvalued today. Jeremy Grantham has a similar number. We are clearly heading into dangerous territory. Equity over-valuation in the US is pushing 1929 levels and within about 30% of the 1999 peak. Andrew highlights the role that a collapse in asset values can have in initiating a credit contraction. It is depressing to find ourselves back in a similar position to the one that we saw not long ago. The time that QE gave us has not been used to significantly reduce debt. The corporate sector in the US is again increasing gearing and the household sector seems to have ended its retrenchment. The only group buying equities in the US are non-financial corporations and in 2009, we saw what happened on the rare occasion when they eased back on their equity buy-backs.
This book should be compulsory reading for everyone involved with markets – particularly at the Bank of England!