What Alan Shearer has to teach us about QE
As the Premier League kicks off for another season, we return to the subject of football transfer fees and the important lesson it holds for investors who have benefitted from rising asset prices since the financial crisis
What a versatile chap Alan Shearer is turning out to be – record goal scorer in the English Premier league, football pundit for the BBC and now The Value Perspective’s favourite go-to illustration when explaining financial concepts.
A couple of weeks back, we learnt what he had to teach us about inflation and now he can help offer an interesting insight into the curious world of quantitative easing or ‘QE’ for short.
QE has become the shorthand term for the various measures taken by the Bank of England, the US Federal Reserve and other central banks around the world in the wake of the global financial crisis of 2008/09.
In essence, it involves buying up government bonds and other securities with the aim of lowering interest rates, making asset markets more liquid and encouraging financial institutions to lend money.
What does QE have to do with Alan Shearer?
Fair enough, you might be thinking but where does Mr Shearer come in? You may have been able to draw some parallels between the mind-boggling increase in transfer fees since the formation of the Premier League in 1992/93 and the damaging effects of inflation on investments savings, but just how do you plan to pull off the same trick with post-crisis investment markets?
Well, both the football transfer and investment markets are relatively ‘closed’ systems that have seen rampant price inflation after receiving huge sums of money – respectively, from TV rights and QE.
Thus, for example, in football we now have Manchester City apparently viewing £50m as the going rate for full backs while in investment we have bonds offering negative yields and very expensive ‘bond proxy’ equities.
Even though other factors in the system may remain constant – a Premier League club can, for example, never field more than 11 players on the pitch at any one time – an enormous influx of money can have a distortive effect.
With the Premier League able to command ever greater prices for its TV rights, therefore, it should come as no surprise that transfer records keep being broken.
Similarly, there has been no increase in the number of, for example, government bonds being issued and so, with central banks buying them up as part of their QE programmes, it should also come as no surprise that yields are at record lows.
That is what happens to bonds when their prices rise – and it is a basic law of economics that, when demand outstrips supply, prices rise.
Money can go the other way
Investors should note, however, there was a period when TV rights actually fell – the 2004/07 contract versus 2001/03 – and, within that timeframe, the £30m Manchester United paid Leeds for Rio Ferdinand was not surpassed.
If you are fortunate enough to hold assets that have benefitted from an enormous influx of money, then, you do need to keep in mind that money could one day start flowing in the opposite direction.
Sooner or later, we are going to reach a time when central bankers stop throwing money at markets and, when that happens, it is unlikely hopes and dreams will continue to be priced at a premium (regardless of whether or not they might actually come true).
Valuation, in other words, will once more become an important factor and, while not all investors may welcome that moment, here on The Value Perspective, we certainly will.
Fund Manager, Equity Value
I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst.
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