This may come as a something of a surprise, but the value and performance of your investments is often determined by just a handful of people scattered about the globe.
They are called central bankers. And while they are not elected, they hold infinitely more power than politicians, together largely determining the performance of the global economy and, as a result, our wealth.
Most people think governments control national economies. They do, to an extent. But in the past 20 years or so, most Western democracies ceded control of monetary policy – the more powerful economic lever – to independent central banks.
In the US, Ben Bernanke calls the stops; Europe’s main man is Mario Draghi; Mark Carney runs the Bank of England; Australia has Glenn Stevens and in Japan, the recently appointed Haruhiko Kuroda has created mayhem in global markets – particularly for gold.
During the course of the next few weeks, we will look at what is happening globally, how this could affect your investment portfolio and what our very own central bank, the Reserve Bank of Australia, is up to.
The primary weapon of any central banker is interest rates. By raising or lowering rates, they can either slow or speed up economic growth, depending on the state of the economy.
But in recent years, central banks in the US, Britain, more recently Japan and to a lesser extent Europe have taken to ever more exotic and inventive ways to influence their economies.
Often, that can have unexpected or unintended longer-term consequences. And that is something that needs to be taken on board when building a portfolio.
The big time institutional investors watch central bank behaviour like hawks. Many of their investment decisions – switching to cash, to shares or even buying gold bullion – are based on what they believe will occur as a result of central bank intervention.
Right now we are in the midst of an unprecedented grand experiment, the final outcome of which no one can foretell.
For the past four years, the world’s biggest central banks have been engaged in extraordinary tactics in a desperate attempt to kickstart their economies. Why? As that old saying goes: put out the house fire before you think about saving the furniture.
Some may feel the global financial crisis ended in 2009. But the aftershocks will continue to reverberate through the world economy for many years to come.
That’s why the world’s biggest central banks are still in emergency brace positions and why interest rates are at record lows. It also partly explains why our currency is near record post-float highs.
And it is the reason you need to keep abreast of what central bankers are up to and why.