The financial boom will continue in the UK and US – politics demands it

We all know that at some stage there will be a reckoning, but as we head into the summer break, this bull market still has a way to run, writes Hamish McRae

‘Despite the disruption to travel plans and the resurgence of Covid-19 cases in some countries, the markets are going into the holiday period with their tails up’ (Getty/iStock)

The bull run continues. Despite the disruption to travel plans and the resurgence of Covid-19 cases in some countries, the markets are going into the holiday period with their tails up.

American stocks have gone on climbing, and house prices are up 17 per cent in the year to May. That is the fastest for 17 years. In Britain, shares have moved sideways, but house prices seem to have survived the ending of the stamp duty holiday, sliding just 0.5 per cent in July, and on the Nationwide tally are still up 10.5 per cent year on year. A similar picture extends across Europe, with the DAX index of German shares reaching an all-time high last month, and the French CAC index up 18 per cent on the year to date.

The boom is starting to show through in current inflation, too. The latest figures for consumer prices in the US are up 5.4 per cent, and while the most recent number for the UK is 2.4 per cent, expect a forecast of a jump in the rate, perhaps to 4 per cent, from the Bank of England’s Inflation Report when it is published later this week.

In Europe, there is a similar pattern. Take Germany, perhaps the most inflation-sensitive nation in the world. The rise in consumer prices for July was provisionally up 3.8 per cent, far above the European Central Bank’s mandate of 2 per cent.

This presents the central banks with two huge questions. The first is immediate: whether the surge in inflation this autumn will be temporary. The second is more philosophical: is it part of their duty to take a view about asset prices, and if necessary to try and cap the boom? Both questions have been around for a few weeks, but they have suddenly become sharper. The price surge has begun. And the markets seem to have taken the view that central banks not only don’t care about high asset prices, but will probably try to put a floor under them if they start to fall.

Institutional investors in the US have however been quite wary of the boom through most of the spring and summer. It has been dubbed an unloved boom driven by “fomo” – fear of missing out – rather than fundamental confidence. But last week State Street reported that investor confidence had become positive. The bank’s research and advisory business has developed an index that measures investor confidence by looking at what institutional investors are buying or selling. Last week it revealed that the index had reached 100.6, a jump of four points.

This has led to people pondering whether US shares really are overvalued, after all. What else do you do with your money, given that you get a negative real interest rate at the bank? Politically it will be very difficult for the Federal Reserve to tighten policy quickly, even if inflation does shoot up. And here in the UK it will be difficult for the Bank of England to do much, at least until the Fed moves decisively.

There is a further twist to all this. The politics seem to favour low interest rates. Whether that is right or wrong is another matter. It certainly seems an odd quirk of society that it should want to favour borrowers over savers, given that everyone urges us to save more. Higher asset prices are popular too. Think how pleased most Britons are if the price of their house goes up, notwithstanding the burden this puts on first-time buyers. And to take the argument one stage further, think how unpopular the present UK government would be were there to be a serious fall in the property market, particularly if that were to happen in the Tory strongholds of the home counties.

So the brutal politics are similar in both the US and the UK. It is massively in the self-interest of both governments to keep the boom going. This does not mean they can go on doing so. We all know that at some stage there will be a reckoning. There always is. But as we head into the summer break, American institutional investors and British home-buyers alike seem to have come to the same conclusion: this bull market still has a way to run.