Markets are going round Cape Horn

What will happen now that QE is starting to taper?

Having had good passage through the warm gulf stream waters of "quantitative easing" ("QE" to you and me) flowing strongly from the shores of the US and latterly Japan, markets have now reached what, in market confidence terms, may be regarded the investor’s equivalent to the nautical experience of going round Cape Horn. We are passing into the rough seas where the conflicting currents of one ocean system, meet those of another. That is to say - translated into impenetrable dry as dust market speak – where the expected "tapering by the US authorities of Quantitative Easing" meets US economies recovery, putting hitherto bullish equity market sentiment to the test. Will the equity bull market of recent times be wrecked by the withdrawal of cheap money? Can you have a continuing bull market fueled by near no cost credit when interest rates start to rise?

We knew that we had moved into these choppy seas this week when the yield on US 10 Year Treasury bonds went through the previous 2 per cent "resistance level" to close at 2.23 per cent. The ship’s timbers may have creaked a little but the SS Equity Markets sailed on the next day, blown by news of the gathering pace of US economic recovery in housing, employment and consumer confidence, only to be blown off course the following day by the shore winds of analysts’ concerns, as they publicly pondered what it meant? Suddenly, the thing that markets hate most - uncertainty - had arrived.

My own view is that equity markets needed what I call a "linear regression down swing" in prices to remain faithful to its longer term trend. In short markets look a bit overbought in a year  when investors decided it was unwise to "sell and go away in May" because they did not want to be out of the market, and short of stock, when something as big and important as the continued stirrings of the long awaited US economic recovery were being witnessed. Consequently, the market was flooded with bearish conjectures as investment banks’ scrambled to take profits on bull positions and at the same time, get back some stock for their market makers, who must have been "short" after a long bull run that continued un-seasonally into May.

I retain my early, long running bullishness of equities, because the US Federal Reserve will tread carefully in managing a return to normalizing its interest rate. I reasonably conclude that it will tailor sales of the bonds it acquired, to fit the balance sheets of non banking providers of finance and credit with enough leg room with the right kind of bond collateral at the right yields, to facilitate the working of short term cash markets. Generally, most big companies balance sheets are in good shape to withstand higher interest rates. As Franklin Roosevelt once reassuringly said, the only thing to fear is fear itself.

Ben Bernanke. Photograph: Getty Images

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The problems with ending encryption to fight terrorism

Forcing tech firms to create a "backdoor" to access messages would be a gift to cyber-hackers.

The UK has endured its worst terrorist atrocity since 7 July 2005 and the threat level has been raised to "critical" for the first time in a decade. Though election campaigning has been suspended, the debate over potential new powers has already begun.

Today's Sun reports that the Conservatives will seek to force technology companies to hand over encrypted messages to the police and security services. The new Technical Capability Notices were proposed by Amber Rudd following the Westminster terrorist attack and a month-long consultation closed last week. A Tory minister told the Sun: "We will do this as soon as we can after the election, as long as we get back in. The level of threat clearly proves there is no more time to waste now. The social media companies have been laughing in our faces for too long."

Put that way, the plan sounds reasonable (orders would be approved by the home secretary and a senior judge). But there are irrefutable problems. Encryption means tech firms such as WhatsApp and Apple can't simply "hand over" suspect messages - they can't access them at all. The technology is designed precisely so that conversations are genuinely private (unless a suspect's device is obtained or hacked into). Were companies to create an encryption "backdoor", as the government proposes, they would also create new opportunities for criminals and cyberhackers (as in the case of the recent NHS attack).

Ian Levy, the technical director of the National Cyber Security, told the New Statesman's Will Dunn earlier this year: "Nobody in this organisation or our parent organisation will ever ask for a 'back door' in a large-scale encryption system, because it's dumb."

But there is a more profound problem: once created, a technology cannot be uninvented. Should large tech firms end encryption, terrorists will merely turn to other, lesser-known platforms. The only means of barring UK citizens from using the service would be a Chinese-style "great firewall", cutting Britain off from the rest of the internet. In 2015, before entering the cabinet, Brexit Secretary David Davis warned of ending encryption: "Such a move would have had devastating consequences for all financial transactions and online commerce, not to mention the security of all personal data. Its consequences for the City do not bear thinking about."

Labour's manifesto pledged to "provide our security agencies with the resources and the powers they need to protect our country and keep us all safe." But added: "We will also ensure that such powers do not weaken our individual rights or civil liberties". The Liberal Democrats have vowed to "oppose Conservative attempts to undermine encryption."

But with a large Conservative majority inevitable, according to polls, ministers will be confident of winning parliamentary support for the plan. Only a rebellion led by Davis-esque liberals is likely to stop them.

George Eaton is political editor of the New Statesman.

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