It is the time of year when investment managers start to finalise their views of the next year and there is an almost universal view that there will be a perfect soft landing for the economy next year, with the minimum of disruption.
Markets are welcoming a slowdown in activity as if it were normal to embrace economic slowing as the most desirable outcome.
In this instance, markets are now afraid of inflation taking hold.
However, there is a touching faith in the power of central banks to fix the economy and inflation prospects by a deft flicking of control switches, something that is, perhaps sadly, not entirely true nowadays.
Years of deregulation and disintermediation in markets and the economy have left most central banks with only the blunt instrument of interest rates to manage monetary policy.
Much of the control is done by pronouncement as central bankers try to steer economic behaviour by means of their statements. The ECB uses its hawkish statements to try and control borrowing, heading off the creation of new debt by means of the fear of increased cost of servicing that debt.
By the same token, the deregulation that has tied the central bankers’ hands in terms of finetuning monetary policy has led to an explosion of credit availability and, in particular, the debt culture of the UK and US economies, something that is now spreading to the eurozone and Japan. Governments removed the credit-rationing processes in the belief that people could manage their own balance sheets.
There are now serious concerns about the levels of personal debt. These concerns are not new at the Bank of England, which wrote almost two years ago about the risks attached to a high level of borrowing by consumers. As rates continue to rise, there is anecdotal evidence appearing of an increase in repossessions in the buy-to-let market in particular and retailers are concerned that the tills will not be jingling this Christmas.
With an economy dependent on heavily indebted consumers who may be about to stop increasing borrowing and retrench, or – whisper it – possibly renege on their debt, the smug market complacency over next year’s outlook may just be misplaced.
Justin Urquhart Stewart is director of Seven Investment Management