It’s a sign of the times that the hot topic at drinks parties I attended over the festive period wasn’t Brexit, nor the country’s obsession with house prices, but cyber currencies. In fact, some fellow partygoers even received an e-wallet in their Christmas stockings chock full of computer code. Not that the recipients had a great understanding of their gift to be honest, which is why they turned to me to explain exactly what Santa had left them.
It caused more than a ripple of excitement when I pointed out that Santa had not only been generous, but shrewd too. In one case, he had spotted a short-term trading opportunity in cyber currency, Ripple, just before it surged ten-fold during December. Whether Ripple will be a cyber currency winner is not the point of this article, nor is whether or not its $100bn valuation is justified. Of far more interest to me is the fact that investors are willing to bet on cyber currencies in the first place, a consequence of the debasing of fiat money by the world’s leading central banks, all of which have pursued ultra-easy monetary policies for the past nine years, and adopted negative real interest rates. These zero interest rate policies have not only forced investors up the risk curve in search of income, but tempted some to speculate on alternative assets in a global financial system awash with liquidity: cyber currencies being just one beneficiary.
Bearing this in mind, it will be interesting to see how some of these alternative investments fare if the US Federal Reserve starts draining liquidity from the monetary system faster than market participants anticipate. That’s not an unrealistic possibility given that the Republicans' recent tax reforms could boost the US economy by as much as 0.8 per cent of GDP per year, according to economists. In my view, a faster rate of tightening of US interest rates poses the greatest risk to financial markets this year, and one that I am keeping an eye on as it has the potential to lead to a spike in volatility, equities included.