Government bond prices have generally risen, and the appreciation of global equities has been faster than that seen in previous periods. Much of this appears to have been caused or aided by central bank easing, particularly when economies faltered and central banks bailed out the markets with rate cuts and quantitative easing.

As a result, we cannot be sure whether financial assets have performed well because underlying factors have been supportive, such as robust growth, low inflation, etc, or whether it is just because central banks have thrown a huge amount of money at the global economy. If it is the latter, it leaves a fundamental fallibility in asset prices, which goes as follows. What happens if an economic disaster occurs but the central bank is unable to loosen policy?This is where we are right now, and we are about to find out if there’s a reckoning for all those years of central bank largesse and financial market bailouts.

Central bankers would clearly argue that their proclivity to pursue easy money was governed, not by a desire to support asset prices, but rather a response to excessively low inflation. Today, the problem is that inflation is far too high. We can debate whether this is a consequence of past policy easing.

However, Mr. Steve Barrow, Head of Standard Bank G10 Strategy said that’s not really the issue. The issue is, what happens to asset prices when central banks can’t ease? For it appears that growth will slow significantly in Europe, possibly even to a recessionary level, and similar downturns cannot be ruled out in other countries, including the United States.At the same time, inflation will stay stubbornly high, if not rise further.

Will investors be able to hold their nerve, and hang on to bonds and stocks if there’s seemingly no chance of a central bank bailout? It would seem that the answer is negative. For some time, we’ve generally adopted a negative view of stock and bond market prospects for just such a conundrum. For, while central banks will presumably tone down their hawkish rhetoric if economies soften, will this be enough to keep investors calm?

Mr. Steve Barrow is sceptical. Policy easing will come in time, but might only be once central banks have pushed policy to a restrictive setting and observed a clear downtrend in inflation towards their target. Will financial markets be patient enough to wait for this, as it could take a good couple of years? It could come sooner if economies really nosedive dramatically and inflationary pressure gets snuffed out in an instant, but that seems unlikely.

There seems to be sufficient forward momentum through factors such as high savings levels and robustness in the labour market to mean that abject economic collapse is not around the corner, barring some new shock, such as a recession in China or Russia's cutting of European gas supplies. In short, inflation is going to stay too high and economies probably won’t weaken sufficiently to allow central banks to move back to easing mode anytime soon. The conclusion, therefore, seems to be that assets like stocks and bonds will have a torrid time.

While we do lean towards this view, we also have to acknowledge how central banks have moved in the past and whether, at the end of the day, they will really live up to their promise of much tighter policy even if economies weaken significantly. Old habits die hard, and it may be the same this time around. Don’t get us wrong; we are not suggesting that central banks will soon undergo a volte-face and cut policy rates.

Mr. Steve Barrow said central banks may be prepared to accept higher inflation in the future than their target levels, not least for the sort of reasons the Fed used when justifying the change to average inflation targeting last year. If that’s the case, there may still be some sort of safety net for asset prices in play, although that does not stop us from thinking that the price of bonds and stocks will fall a lot further before these nets become visible.